CONFLICT OF INTEREST AND THE AUDITOR INDEPENDENCE (A CASE STUDY OF PRICE WATER HOUSE COOPERS)
Chapiter 1
Introduction
Background Information for the Study
The principles of a conflict of interest and the independence of the auditor must be carefully taken into account when working on this project. If the conflict of interest of the auditors has any effect at all on his independence.
According to Andrew (2004), the first auditor conflict of interest is a situation where an auditor trades off the impact and bias of his report. In this sense, there are two different kinds of conflicts of interest. Conflicts between form and clients’ interests and conflicts between the interests of two or more clients, such as when an auditor or audit team has a long-standing connection with a client, arise when an auditor receives compensation from a third party.
While the term “auditor’s independence” refers to the auditor’s impartiality toward parties with a stake in an entity’s financial statements.
This often protects the auditor’s reputation for objectivity and honesty throughout the auditing process.
It is clear that there is an auditor conflict of interest, meaning that for either of the two types of conflict, there is typically an auditor exchange of influence and basis that could cause the auditor to deliver inaccurate reports and subsequently harm the auditor independence.
The concept of auditor independence was regarded as being of utmost importance, and the elimination of conflicts of interest that resulted from financial relationships between auditors and their clients was the main focus. Over the years, the definition of auditor and auditor’s independence have evolved alongside the accounting profession itself.
The ideas of audit and independence are like two sides of the same coin. A dependent auditor who has lost his independence has also lost his sense of purpose and will have a conflict of interest with his clients. The need to demonstrate independence is now a pressing concern, just as it was in the nineteenth century.
1.2 Problem Statement
Financial reports serve as a formal record of business activities and give shareholders, managers, employees, tax analysts, banks, and other users of these financial statements an overview of the financial position and profitability of companies over the short- and long-term. However, in recent years, financial manipulations, shoddy internal control systems, a lack of knowledge on the part of the audit committee and board of directors, deception on the part of the reporting auditor, and other fraudulent activities that take place within businesses have damaged companies’ reputations with the general public.
The well-known Enron case serves as a typical illustration of a financial statement error. One of the biggest US energy firms was Enron.
Enron executives evaded income taxes through fraud and bribery, which contributed to the multibillion-dollar company’s demise. Importantly, this wasn’t the first instance; in fact, a scenario very much like it occurred in 1973, when stock funding a Los Angeles-based insurance company filed for bankruptcy (Don, 2006).
In reality, a new company fraud is uncovered every year, frequently involving the same elements: organizational instability, uniformed accountants, high-level connections, and broke investors (Knapp, 2005). When Omaha-based Inter-North combined with Houston Natural Gas in July 1985, Enron was born.
Kenneth Lay, who had previously worked in the government and academia, was appointed chairman and chief executive. Enron has become one of the biggest energy corporations in the world by 2001. However, the business abruptly disintegrated and failed. Other indigenous companies that have failed include African Petroleum (2000) and Lever Plc (formerly Unilever) from 1998. From the explanation above, it is clear that in order to boost user confidence and influence investors’ behavior, organizations’ financial statements must be credible.
This study looks into the causes of company failure and how auditor independence contributes to it.
1.3 The Study’s Objectives
This study’s major goal is to investigate particularly how conflicts of interest affect the independence of auditors.
The precise research goals are:
1. To determine how interest effects affect the independence of the auditors.
2. To determine whether the conflict of interest could lead to biased judgment and choices made by the auditor.
1.4 Hypothesis Statement
A research hypothesis is a statement or supposition that may not be accurate with regard to a population or populations.
The alternative hypothesis (Hi) and the null hypothesis (Ho) are the two different sorts of hypotheses. The research hypothesis’ null hypothesis is a notion that is untrue. Once the wall hypothesis is disproved, the alternative hypothesis is adopted. The formulated hypothesis is given below.
First Hypothesis
HO: Conflicts of interest have no bearing on the independence of the auditors.
HI: A conflict of interest affects the independence of the auditor.
Second Hypothesis
HO: An auditor’s judgment and decisions are not tainted by conflicts of interest.
Hi: A conflict of interest might skew an auditor’s judgment and choices.
1.5 Importance of the Research
These people will benefit from this study’s findings and recommendations because it will shed light on the conflicts of interest that auditors face and how these affect their independence.
Auditors: This study will be helpful to auditors in that it reveals conflicts of interest, which will help them when performing their audit work.
c. People who might want to work as auditors in the future. They will use these findings as guidance when they carry out their audit procedure.
c. Companies that employ auditors emphasizing their knowledge of the laws governing the independence of auditors.
1.6 Study’s Scope
This study’s focus was only on Water House Coopers, one of the biggest international providers of professional services.
1.7 Limitations of the Study
Many restrictions were satisfied throughout the course of this research project. Among other things, the first was merging and connecting the research work to gather information pertinent to the study. Another restriction is:
Finance: The researcher also confronted the issue of having insufficient funding to conduct quality study on the aforementioned topic.
Time: Finding research materials and other pertinent information frequently took a lot of time. This, in addition to the previous items, presented the researcher with a significant obstacle.
1.8 Definition of Terms
Accountability: It is the responsibility of stewards or agents to offer accurate information about resources that are under their control and that affect other people.
The amounts of all items in a company’s account are to be determined in accordance with the accounting standards.
An auditor’s opinion on financial statements is known as an audit opinion.
The assets, liabilities, and capital of an organization are displayed in the statement of financial position at a specific point in time.
A financial statement of an enterprise’s income and expenses is called a “statement of comprehensive income.”
Auditors’ Attitude: An auditor’s ability to effectively assess his difficulties depends on a combination of education, experience, and judgement that gives him a frame of mind and perspective toward his task.
Audit Services: Fee-based services offered by qualified individuals to offer a reasonable level of assurance that the financial statements of the organization are fairly presented.
Auditor: A third-party expert tasked with certifying the accuracy of a company’s financial statements.
To have a reasonable assurance that the auditor’s decisions were made independently of the client or other parties, there must be a certain level of trust between the auditor and the client.
Conflict of Interest: The situation in which a person’s judgments and opinions are formed to further their own interests rather than those of other interested parties.
Non-Audit Services: The auditing company offers free services that have nothing to do with the audit contract.
An audit report is a statement that an auditor makes on financial statements.
Financial Statements: The auditors’ reports identify the following as components of the financial statement: the 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.
Fraud is the purposeful misinterpretation of facts by one or more members of management, staff, auditors, or other parties. It also refers to the use of deception to acquire an unfair or illegal financial benefit.
True and Fair View: The accounting standards were given a legal opinion stating true and fair view, which auditors must follow.
Low-Balling: The practice of an auditor reducing audit fees in order to preserve or maintain a working relationship with clients that may one day be beneficial.
Objectives Assessment: An auditor’s view or judgment of a company’s financial statements that is uninfluenced by the clients’ or other parties’ personal feelings.
Information gathered to reach the conclusion on which he based his judgement regarding a company’s financial accounts is known as audit evidence.
Audit Fees: The whole and combined amount charged by the auditor to the client for their services.
Institutional Provisions: These include auditing standards and auditing guidelines, which are declarations made by professional accounting groups outlining the fundamental values, standards, and processes that members must follow when conducting audits.
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