Please reply to the below discussion in 2 paragraphs. In the first, clearly state with which parts of the other student’s thread you agree or disagree. You must provide an explanation for why you agree or disagree with the other student’s thread. In the second, add some additional comments of your own that add to the discussion.  the reply must be at least 200 words.

To first understand the importance of auditor independence between a client and the auditing of their financial statements, it is important to understand the definition of auditing. It can be defined as the systematic process of objectively obtaining and evaluating evidence regarding assertations about economic actions and events to ascertain the degree of correspondence between the assertations and established criteria and communicating the results to interested users (Louwers, Blay, Sinason, Strawser, & Thibodeau, 2018, p. 4). In order for the auditor’s report to have credibility there can be no room for questioning. The relationship between the auditor and the client must be strictly professional for the review to be deemed trustworthy to the interested users such as creditors, lenders, and shareholders. The audit quality is determined by the auditors probability that it will uncover a breach and report it (Tepalagul & Lin, 2015). Without independence the auditor is more likely to not report a breach and would then impair the audit quality (Tepalagul & Lin, 2015).

            Some of the ways that threaten auditor independence are client importance, non-audit services, auditor tenure, and client affiliation with audit firms (Tepalagul & Lin, 2015). Familiarity can compromise the quality of reporting. As with all things, when a friendship or partnership has been developed the boundary lines of professionalism can threaten that relationship which can cause scenarios that create unwanted suspicions. As previously stated, there is just no room for this compromise of quality in a business relationship regarding the confidence of financial statements. The significance of credibility fueled a passage in the 2002 Sarbanes-Oxley Act. It prohibits the auditor from providing most non-audit services to its clients; imposing a 1-year cooling-off period from former auditors landing jobs at their clients; and requiring audit partners to rotate every 5 years (Tepalagul & Lin, 2015).

            Independence in both fact and appearance is required across multiple accounting and business organizations including the American Institute of Certified Public Accountants (AICPA), the State Boards of Accountancy, the Public Company Accounting Oversight Board (PCAOB), and the Securities and Exchange Commission (SEC) (Gramling & Karapanos, 2008). “Auditor independence is one of the underpinnings of the U.S. federal securities laws, which requires financial information filed with the SEC be audited by an independent public accountant” (Gramling & Karapanos, 2008). The agenda of these agencies in stressing auditor independence was to cultivate high quality audits and promote investor confidence in the audited financial statements of public companies. After the fraudulent activity of major public companies such as Enron and WorldCom it was important for accounting committees and the government to establish faith in the reliability of financial statements to support investor activity and to foster a healthy economy.

References

Gramling, A. A., & Karapanos, V. (2008). Auditor Independence: A Focus on the SEC Independence Rules. Issues in Accounting Education, 23(2), 247-260.

Louwers, T., Blay, A., Sinason D., Strawser, J., & Thibodeau, J. (2018). Auditing and assurance services. New York, NY: McGraw-Hill.

Tepalagul, N., & Lin, L. (2015). Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), 101-121.