Independence Test for Former Auditors and Accountants Joining Company Boards

Independence Test for Former Auditors and Accountants Joining Company Boards

Introduction

It's important that financial statements are audited to ensure that capital market functions well and an effective corporate governance exist. The main purpose of audit comprises of

Enhances the validity of financial statements.

Improves the functioning of capital markets and helps users to make sound decisions.

Helps in lowering the cost of capital.

We will be exploring the issue of retired auditors joining as the board of directors. A detailed discussion on the implications & benefits will be discussed on the paper.

Discussion

The requirements for independence of the Auditors

As part of the statutory requirements of Australia, a general standard of independence has been adopted. The Corporations Act with its Subdivision 3 comprising of Part 2M.4 talks about an auditor's independence. The obligation under the act entails the conflict of resolution. Such situation emerges when an auditor does not exercise impartiality while conducting an audit and bearing in mind all the relevant circumstances applicable (section 324CD). This test of independence is referred as subjective test.

A personal with reasonable care would infer logically by having all the relevant information with him that the auditor being faced with certain circumstances and relationships with client won't be able to exercise impartiality. This is known as the independence test, which focuses on the appearance.

Objectivity in mind and appearance needs to be applied at a continual level and the important thing to look out for is the circumstances facing the auditor and the auditor's relationship with the clients. This enhances the confidence of creditors and investors in the financial statements.

Independence Test for Retired Auditors

The issue that has gained noticeable attention in recent times involved the retired audit partners who then later join the board of the respective audit clients. A large proportion of the stakeholders identified this as a grave cause of concern violating the independence of the auditor greatly. When such a violation occurs, it's generally considered as a threat to the independence of an audit firm. The issue not only concerns former partner later going on joining audit client. The cause of concern arises when partners exercise their influence on the audit firms and having some sound financial setup with their audit firm.

Threats to Independence

The issues that emerges as a result of retired professionals joining company board comprises of the below mentioned factors.

The audit members which gave resignation for the sake of joining the company board may not have fully exercised due diligence before them leaving the audit process. Those resigning from the audit board will have a full idea regrading the approach use by the audit board as well as its testing strategy. When these individuals become a part of the company's board of directors they will know all the tricks related to how to avoid the audit boards testing strategy and all their procedures.

The member of the audit firm who then goes on to join the company's board of directors will have a strong relationship ...