Conflict Of Interest And The Auditor Independence (A Case Study Of Price Water House Coopers)

Conflict Of Interest And The Auditor Independence (A Case Study Of Price Water House Coopers)

First Part

Introduction

1.1 Background of the Research

Conflict of interest and the independence of the auditor are two concepts that must be properly considered in this project’s work. If the auditor’s conflict of interest effects his independence in any way.

According to Andrew (2004), auditor’s conflict of interest is a situation in which an auditor trades off the influence and bias of his report. In this regard, there are two categories of conflicts of interest. There is a conflict between the auditor’s compensation from a third party and the client’s interest, as well as a conflict between the interests of two or more clients, such as when an auditor or audit team has a long-term relationship with multiple clients.

While auditor independence refers to the auditor’s independence from parties with an interest in an entity’s financial statement.

This safeguards the auditor’s integrity and the audit process’ objectivity.

It is evident that there is an auditor’s conflict of interest, i.e., either of the two categories of conflict of interest, there is typically auditor trade of the influence and been based, which could result in the auditor not providing an accurate report, thereby compromising auditor independence.

The concept of independence was deemed to be of utmost importance, and the focus was on the elimination of conflicts of interest resulting from auditors’ financial relationships with their clients.

The concepts of audit and independence are paired like two sides of a coin. The auditor who has lost his independence has lost all sense of reason; he has become a dependent auditor and will have a conflict of interest with his clients. Independence is as vital a concern as it was in the nineteenth century, and it must still be demonstrated.

1.2 Statement of the Issue

The purpose of financial reports is to serve as a formal record of business activities and to provide an overview of a company’s financial position and profitability over the short and long term to users such as shareholders, managers, employees, tax analysts, banks, etc. In recent years, however, financial manipulations, weak internal control systems, ignorance on the part of the board of directors and audit committee, manipulation on the part of the reporting auditor, and other fraudulent activities within companies have contributed to a decline in the public’s perception of the integrity of businesses.

The well-known instance of Enron is a typical example of a financial statement failure. Enron was one of the major energy firms in the United States.

Enron executives avoided paying income taxes through fraud and extortion, which led to the demise of the multibillion-dollar company. Importantly, this was not the first instance; a comparable case occurred in 1973, when a Los Angeles-based insurance company that received equity funding went bankrupt (Don, 2006).

In fact, each year a new business fraud is uncovered, frequently involving similar elements such as corporate instability, uniformed accountants, high-level connections, and bankrupt investors (Knapp, 2005). In July 1985, Omaha-based inter-north merged with Houston natural gas to form Enron.

Kenneth Lay, who had previously held academic and government positions, was appointed CEO and chairman. Enron had become one of the greatest energy companies in the world by 2001. However, the corporation abruptly disintegrated and failed. Lever Plc, now Unilever, in 1998 and African Petroleum in 2000 are two other examples of corporate failure on the local level. Based on the preceding discussions, there is a need to ensure the credibility of a company’s financial statements in order to increase user confidence and influence investor behavior.

This study aims to investigate the causes of corporate failure and how auditor independence contributes to it.

1.3 Purposes of the Study

The primary objective of this study is to investigate the impact of conflicts of interest on the independence of auditors.

These are the specific research objectives:

Assess the impact of interest influences on the independence of the auditors.

To determine whether a conflict of interest can influence the auditor’s judgment and decisions.

1.4 Proposition of the Hypothesis

A research hypothesis is a statement or assumption that may or may not be true regarding one or more populations.

There are two different categories of hypothesis: the null hypothesis and the alternative hypothesis. The null hypothesis is a negative form of research hypothesis proposition. Once the wall hypothesis is rejected, the alternative hypothesis is adopted. Below is the hypothesis’s formulation.

First Hypothesis:

Conflicts of interest do not affect the independence of auditors

Conflict of interest has an effect on the auditor’s independence.

The second hypothesis

Auditors’ judgments and decisions are not influenced by their conflicts of interest

A conflict of interest can influence the auditor’s decisions and judgment.

1.5 Importance of the Research

This study will assist in revealing auditor conflicts of interest, their impact on auditor independence, and its findings and recommendations will benefit:

a. Auditors: The auditors will benefit from this study because it identifies conflicts of interest, which will aid them in their auditing duties.

b. Those who may desire to become auditors in the future. This research will serve as a guide for them as they conduct their audit.

c. Organizations that employ auditors educating them on the laws governing auditor independence.

1.6 Scope of Research

This investigation was confined to Price Waterhouse Coopers, one of the world’s largest professional service providers.

1.7 Restrictions of the Research

So many obstacles were encountered while conducting this investigation. Obtaining information pertinent to the research was the first step, followed by combining and correlating the research work. Additional restrictions are:

Finances: Insufficient funds prevented the researcher from conducting sufficient investigation on the aforementioned subject.

Finding research materials and other pertinent information often required a significant amount of time. In addition to the foregoing, this presented a formidable obstacle for the researcher.

1.8 Explanation of Terms

It is the responsibility of stewards or agents to provide accurate and pertinent information about the resources they manage and that have an impact on others.

Accounting Principles: These are the guidelines for determining the quantities of all items in a company’s accounts.

Audit Opinion: This is the auditor’s opinion on the financial statements

Statement of Financial Position: This displays an organization’s assets, liabilities, and capital as of a specific date.

Comprehensive Income Statement: This is a financial statement of an enterprise’s income and expenses.

Auditors Attitude: A combination of education, experience, and judgment provides an auditor with a frame of mind, a perspective on his work, that enables him to accurately appraise his problems.

Audit Services: Fee-based services rendered by qualified professionals who provide reasonable assurance that a company’s financial statements are presented equitably.

Auditor: The external professional charged with attesting to the accuracy of the financial statements of a company.

Independence of the auditor: The expected relationship between the auditor and the client in order to obtain reasonable assurance that the auditor’s judgments are independent of any influence from the client or other parties.

Conflict of Interest: The perceived or actual condition of an individual in which the individual’s judgments and opinions are formed to promote the individual’s own interests over those of other interested stakeholders.

Non-Audit Services: Fee-based services performed by the auditing firm that are unrelated to the audit engagement and are provided free of charge.

Auditors Report: A report prepared by an auditor based on financial statements.

Statement of Financial Position, Statement of Comprehensive Income, Statement of Cash Flows or Total Recognized Gains and Losses, Notes and Other Statements, and Explanatory Material, which are all identified as part of the financial statement in the auditors’ reports.

Fraud is the use of deception to obtain an unjust, unlawful financial advantage or the intentional misinterpretation by one or more management, employees, auditors, or other parties.

True and Fair View: The accounting standards obtained a legal opinion stating that auditors must adhere to a true and fair view.

Low-Balling: The reduction of audit fees by an auditor in order to protect or establish a relationship with clients and to create a relationship that may become profitable in the future.

Objectives Assessment: An auditor’s opinion or evaluation of a company’s financial statements that is uninfluenced by the auditor’s personal emotions or those of clients or other parties.

Audit Evidence: The information obtained for the purpose of forming an opinion about the financial statements of a business.

Audit Fees: The total and accumulated fees generated by the auditor for supplying services to the client.

Institutional Provisions: These include auditing standards and auditing guidelines, the statements issued by accounting profession bodies establishing the fundamental principles, procedures, and ethics to be adopted by members in the conduct of an audit and the manner in which they should be applied.