External Auditing have existed since start of last century. In recent times, there are question marks on their roles in conducting the audits independently. Let me explain the Independence Issue from the audit view point.
External Auditors are required to be independent from the Management of their clients esp., listed clients. There shall be no direct relationship between both Auditor and Clients, such as direct blood relation between client management and audit team members. In most of the countries where we have listed entities, corporate world is regulated by Securities Exchange Commission. This is all what we know about the independence.
New questions have arisen about the independence of Auditors. Since most, if not all, audit firms are providing consultancy services, shall they provide auditing services to such clients!
The answer is tricky!
Independence as per the text book rule allows it but in accountancy there is a concept called “substance over form”. Is this the case of substance over form like all the accountants take care of while preparing the Financial Statements and Notes to Financial Statements. Leading Audit firms have tried to mitigate this issue by the creating an off-shoot consulting firms which are not under the same management. However, since most of the Audit firms propagate the issue of Ethics, is it a typical case of working as a corporate entity by registering itself as a free zone entity to save tax!!
We shall continue with our discussion in our next episode…!