Impossibility of Auditor Independence

Topics: Financial audit, Audit, Auditing Pages: 7 (1982 words) Published: April 18, 2013
The Impossibility of Auditor Independence

Intentional collusion of auditors and their clients is is not the major cause of Audit integrity. Most of the times, auditors find it difficult to become objective. In 1992, Phar-Mor, Inc. drugstore in the United States seeking a court protection from corruption failed a court case. The previous auditors, Coopers & Lybrand, Phar-Mor's failed to state inventory inflation and manipulation of finanicial that lead to overstating of $985 million earnings in a period of three years. The judges found Coopers & Lybrand answerable for fraud to the joint investors. The attorney for one investor argued that "this sends a strong signal to the accounting community that investors take very seriously the role of audited financial statements and rely on them for their integrity."' The investors who successfully sued Coopers & Lybrand contended that Gregory Finerty, the Coopers & Lybrand partner in charge of the Phar-Mor audit, was "hungry for business because he had been passed over for additional profit-sharing in 1988 for failing to sell enough of the firm's services."' Analysist, argue that Independence of audit was hindered by relationship with the management. Unjustified certification of financial statement like The Phar-Mor case are of many cases where auditors have been held responsible. Investors in the MiniScribe Corporation maintained that auditors were at least partially responsible for the now-defunct company's falsified

financial statements; at least one jury agreed, holding the auditors liable to investors for $200 million. In the U.S. financial reporting of savings and loan crisis has led to lose of millions of dollars by audit firms settling lawsuits and out-court suits making them collapse. The accounting profession claim that plaintiffs unjust actions are aimed looking for a convenient "deep pocket" towards recovery of their unplanned business decisions. The accounting profession’s role in financial reporting has experienced low reputation by investors and lenders. How could auditors not see that so many of their savings and loan clients were about to fail? How could a prominent auditing firm with a reputation for integrity overlook such large misstatements in Phar-Max H. Bazerman is the J. Jay Cerber Distinguished Professor of Dispute Resolution and Organizations at the J. L. Kellogg Graduate School of Management, Northwestern University. Kimberly P. Morgan is a certified public accountant and a Ph. D. candidate at the Katz School of Business, University of Pittsburgh. Ceorge F. Loewenstein is professor of economics, department of social and decision sciences, Carnegie Mellon University.

First, the auditor-client relationship greatly influences opinions made about financial statement by auditors . Even the most professional auditors find it almost inevitable to maintain independence with the current audit procedures. Imagine situation where professionals deliberate their duty without prejudice at all times. For example doctors treating patients without expecting salary. Teachers in schools guiding learners selflessly.However, teachers, doctors or judges are motivated by their own gains making them vulnerable to impartial judgments and not necessarily corrupt. Auditing mandated to provide direction to shareholders and stakeholders posses big losses in case it fails to detect malpractice in financial statements preparation. The management hire, mandates and even suck auditors. Therefore, auditors serve the interests of their employer hence seem bias.

The American Institute of Certified Public Accountants (AICPA) states in its Code of Professional Ethics: "In the performance of any professional service, a member shall maintain integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others. . . . Members should accept the obligation to act in a way...
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