ARE EXTERNAL AUDITORS TRULY INDEPENDENT?

I have chosen to write on external auditors because internal auditors are mostly prone to non-independence given that in 90% of the cases if not more (where internal auditing isn’t outsourced), these auditors are employees of the organization where they audit and regardless of authority relationship within the organization, they find themselves reporting to either their CEO or CFO.

Firstly, let’s understand that an external auditor is a person (mainly a firm though) who is not a member or an employee of the company being audited, he (or the firm) is a professional (accountant or accounting firm) accredited by statute to carry out the audit of a company and to form an opinion on the audit and expressly report such opinion to stakeholders.

According to accounting tools, ‘’An external auditor is a public accountant who conducts audits, reviews, and other work for his or her clients. An external auditor is independent of all clients, and so is in a good position to make an impartial evaluation of the financial statements and systems of internal controls of those clients. The resulting audit opinions are highly valued by members of the investment community and creditors, who need an independent appraisal of the financial statements of organizations’’.

External auditors are certified by a governing body, which in the United States is the American Institute of Certified Public Accountants, in Nigeria is the Institute of Chartered Accountants of Nigeria. As certified public accountants, external auditors have proven that they have a certain minimum level of training and experience, and have passed a lengthy examination.

These auditors must also fulfill periodic continuing professional education requirements in order to keep their certifications current https://www.accountingtools.com/articles/2017/5/6/external-auditor

in my words, auditing is the examination of the records of an entity’s past operational and financial activities with a view to opine whether those records were kept in accordance with the entity’s internal control requirements as well as both local and international operating and financial standards and principles like GAAP, SAS(Nigeria), IFRS etc.

The question that begs for answers is whether these standards and professional certifications have helped external auditors to be as independent as they truly should be;

We know from Wikipedia that the purpose of an audit is to enhance the credibility of financial statements by providing written reasonable assurance from an independent source that they present a true and fair view in accordance with an accounting standard. This objective will not be met if users of the audit report believe that the auditor may have been influenced to not be independent by other parties, more specifically company managers/directors or by conflicting interests (e.g. if the auditor owns shares in the company to be audited or has one form of interest or the other in that company). In addition to technical competence, auditor independence is the most important factor in establishing the credibility of the audit opinion.

Auditor independence is commonly referred to as the cornerstone of the auditing profession since it is the foundation of the public’s trust in the accounting profession. Since 2000, a wave of high-profile accounting scandals has cast the profession into the limelight, albeit negatively affecting the public perception of auditor independence. https://en.wikipedia.org/wiki/Auditor_independence So then, are external auditors truly independent?

Well, a very celebrated case that seemed to deflate the external auditors’ independence is the enron case, remember the enron case? Where Enron’s accounting firm, Arthur Andersen, was accused of applying reckless standards in its audits because of a conflict of interest over the significant consulting fees generated by Enron. https://en.wikipedia.org/wiki/Enron_scandal

The bottom line of the case was that the personal interest of the external auditors warranted an opinion that was fraught with deceit.

Question is, is there truly an external auditor without an iota of vested interest in the company being audited? The answer is NO in my opinion because even the fee paid by the company under audit (regardless of value) is a form of interest that should be safe guarded. given all of these, It’s hard to say that external auditors are completely and truly independent.

What then can be done to ameliorate this demeanor or (if you prefer) unethical attitude of external auditors?

A lot have been done to guard against unethical behaviors of external auditors including holding external auditors under the oath of code of conduct, enshrining litigations under vicarious liability and outright professional misconduct litigation or even criminal litigation, yet these did not discourage the unhealthy situation in the enron saga! So, in my view the following recommendations should be considered as critical points to add color to the assurance of external auditors’ independence.

1.   The primary professional body of the external auditors (providing over sight functions on them) should consider taking further steps by getting involved in audit fees due to external auditors by not just setting external auditors audit fees in categories based on the auditors’ clients level but ensure that full fees are paid to concerned external auditors in accordance with set fees

2.  External auditors should not be engaged by a company for a period in excess of three years

3.  External auditors’ professional bodies should set up very active ‘’peer review committee’’ that would review audited financials before making them public or filing with relevant government agencies, these can be for high level audits financials for which public interest is keen and invaluable.

4.  The professional bodies of these external auditors should also get involved in providing audit jobs for its members and ensure they are professionally engaged; when these auditors are well engaged with no fear of staying out of job, the propensity to be misguided reduces.

5.  The professional bodies should up their ‘’oversight function’’ on external auditors.

6 .  Government of each country should, to some extent, hold the external auditors’ main professional bodies

responsible for professional misconduct on the part of external auditors

I understand that my recommendations may tend to mean prying too much into the activities of external auditors but to me they would help to instill the much desired sense of independence on the part of external auditors. In any case, my recommendations relate to ONLY external auditing where an external auditor would give an opinion that could affect public investment decision making and to no other areas of the professional accountant’s job.

Henry Eze

Professional Accountant,

Port Harcourt, Nigeria