The importance of spiritual capital of individuals can be traced back to the resistance of independent auditors in the face of client manager power in ethical dilemma situations. This capital which is defined as a component of intellectual capital is integrated to auditors’ livelihood. This research found some related individual factors in auditing area and classified them under SpCi. Morals, ethics, personal values, and culture are the four most related factors which are applied as dimensions of SpCi (...) in auditing area. Hence, this paper attempts to investigate into the effect of SpCi and its four dimensions on an independent auditor’s opinion. The respondents of this research were 321 Iranian audit managers and partners. The data were collected through questionnaires, and multiple regressions were applied to analyze the data. The results showed that the SpCi and its dimensions affect an independent auditor’s opinion. (shrink)

‘The independence of auditors is primarily an issue of perception and communication’. The author is Professor of Auditing at Maastricht Accounting and Auditing Research Center University of Limburg, and University of Amsterdam; and a partner of Coopers & Lybrand Dijker Van Dien Accountants, Amsterdam. He wishes to express his thanks to Gijs Bak, Tony Bingham, John Hegarty, Wim Moleveld, David Pimm and Arno de Schepper for their valuable comments.

The concept of “auditor independence”—that the provider of assurance on financial information should be free of conflicting interests—is deeply embedded in the world’s capital markets. This paper examines stresses on the global model of Big Audit that call into question both the basis and the ongoing usefulness of auditor independence: The threats to the stability of the model, based on the dominance of the Big Four international accounting networks in providing audit services to the world’s large public companies. The balance (...) between benefits and detriments of the independence requirements, and standards that are difficult to articulate and enforce. The implications for the continued value of independent assurance emerging from the evolution in Big Data tools and analytics, including the structural constraints of regulation. A broad re-examination is called for, in aide of the design of a sustainable public-company assurance model that is fit for purpose in the twenty-first century. (shrink)

The authors apply the issue life cycle model to analyze the 1999 through 2001 dispute between the Securities and Exchange Commission and the accounting profession concerning auditor independence. The analysis also brings additional insights that extend understanding of the issue life cycle and issues development. This analysis highlights the roles of a trigger event, the shift of an issue from a technical concern to a public debate, and likely recurrence. The reappearance of the auditor independence issue in 2002 with accounting (...) scandals is consistent with the article’s findings and highlights the use of the issue life cycle model and issue evolution. (shrink)

This paper explores the practices of auditors in a non-Western cultural environment. Drawing on Alasdair MacIntyre’s virtue ethics framework and narrative interviews with twenty Tunisian auditors, we investigate how auditors reconcile their duty to independence with the expectations of a kinship economy. Additionally, we explore how institutions—such as professional oversight bodies—play into this reconciliation. We find that, although auditors may pursue a telos at odds with international auditing standards, the purpose that these auditors serve is (...) congruent with their moral tradition. That is, rather than positioning themselves as objective arbiters of financial reporting, these auditors position themselves as guardians of their auditees. While this revised position engenders conduct that may appear to violate their independence, our auditors’ practices are congruent with the virtues of justice, courage, and honesty, as they conceive of them in the context of a Tunisian moral tradition. This study makes two main contributions to the literature. First, we provide empirical evidence into the ways in which auditors redefine independence in the context of a kinship economy. Second, we demonstrate that, when auditing local firms, auditors apply a version of professionalism that emphasizes community-oriented care over objectivity. (shrink)

Some critics of the accounting/auditing profession in the United States claim that independence-related quality control problems are the cause of an increased number of alleged audit failures. Certified public accountants (CPAs) were queried regarding independence impairment in their profession. Questionnaire results indicate a number of CPAs believe independence deficiencies exist, and some CPAs admit to personal independence impairment.

This paper argues that independent auditors have lost sight of their obligation to be truly impartial, and have increasingly adopted an attitude of client advocacy. We argue that auditors have a professional obligation to go beyond merely passing judgment on whether client accounting methods are acceptable under GAAP, and to judge whether the principles adopted are the most appropriate under the circumstances. We then review recent evidence which suggests that auditors have abandoned this objective in favor (...) of advocating client-preferred principles. The results of a survey of public accountants employed by small CPA firms indicates that, in a scenario in which an auditor did not feel that the client's accounting treatment was the most appropriate under the circumstances but it was recognized as an acceptable alternative under GAAP, advocacy of the client-preferred approach is considered appropriate and is very likely to occur in practice. In less subtle cases (e.g., when the auditor did not feel that the client's treatment provided the best reflection of the economic substance of the underlying transactions), survey participants as a group were ambivalent regarding the appropriateness of client advocacy, and felt that subordination of judgment was likely to occur in practice. The results also indicate that engagement risk, or the risk that the firm will be harmed by aggressive behavior, affects judgments of both the appropriateness and likelihood of subordination of judgment. These findings suggest that auditors have adopted an ideology of client advocacy, within the constraints of engagement risk. (shrink)

Financial statement users must believe that external auditors are free from management control, or users will doubt the verity of auditors' representations. Although U.S.-based auditing firms claim they are independent of their corporate clients, research has demonstrated that many individuals and groups perceive the situation otherwise. A proposal for enhancing perceptions of auditor independence is offered in this article. The proposal calls for an auditor-administered educational program, complemented by corporate audit committee involvement to lend credibility to (...) class='Hi'>auditors' claims. (shrink)

This paper presents an analysis of the opinions of U.K. Finance Directors – also known as Chief Financial Officers (CFOs) in North America – on factors which may effect the roles and responsibilities of the external auditor to the organization. A number of proposals have been put forward over the years to enhance auditor independence and these were treated as dependent variables in this study. A questionnaire was mailed to 3 000 named Finance Directors and 776 useable replies were received. (...) From the responses to the questionnaire, three independent variables were identified: opinions on the value of the audit in general; opinions on the impact of the audit on the organization; and the relationship between the Finance Director and the auditor. The results reveal that those Finance Directors concerned in general about the value of auditing favoured the banning of non-audit work and the rotation of auditors. In addition, those Finance Directors with good relationships with their external auditors preferred the banning of non-audit services and the rotation of external auditors. Those respondents favouring the separate regulation of auditors were also concerned about the impact of the audit on the organization. The results of this study shed some light on the sensitivity of U.K. Finance Directors to ethical issues regarding external auditor independence. (shrink)

This research explores the relationship between work context and professional ethics. Specifically, we analyze through an online survey of professional accountants the degree to which changing work conditions have altered individual accountants ’ commitment to the core professional value of auditor independence. We argue that certain changes in the condition of work have made some categories of accountants more susceptible to the logic of commercialism rather than the logic of professionalism. We find general support for this argument. We observe that (...) accountants working outside of public accounting have a higher commitment to independence than do accountants working in the context of public accounting firms. We further observe that accountants in large international accounting firms report lower commitment to auditor independence than do others in public accounting. And we observe that older accountants report stronger commitment to auditor independence. One finding, however, contradicts our general thesis. We find that commitment to one’s client does not necessarily result in a loss of commitment to the core professional value of independence. We conclude that changes in the context of work have contributed to the demise of ethics among professional accountants and suggest that further research be done to elaborate the relationship between client commitment and independence commitment. (shrink)

In the Chinese stock market, special treatment (ST) firms are the firms listed as facing imminent danger of delisting, unless they return to profitability after reporting two consecutive annual losses. Some ST firms voluntarily pay substantial fees to their external auditors to conduct interim audits, which are not required by regulations. In this study, we investigate and find that ST firms that pay for voluntary interim audits report greater discretionary accrued earnings, higher non-operating earnings, and higher returns on assets (...) in ensuing annual reports. As a result, these firms are more likely to return to profitability and reduce their delisting risk. Our results, which contribute to the current debate on auditor independence, appear to be consistent with the possibility that ST firms “buy” external auditors’ cooperation to manipulate earnings when faced with the threat of delisting. (shrink)

This paper analyzes the rhetoric surrounding the profession’s presentations of auditor independence. We trace the evolution of thecharacter of the auditor from Professional Man in the early years of the twentieth century to the more public and abstract figures of Judicial Man and Economic Man. The changing character of the auditor in the profession’s narratives of legitimation reflects changes in the role of auditing, in the economic environment, and in the values of American society. Economic man is a self-interested and (...) shallow character who offered the auditing profession little protection against involvement in corporate scandals. In the wake of recent accounting scandals, the profession is calling for a return to the character of Professional Man to restore trust in audits and the financial markets.We also analyze the philosophical bases of the metaphors surrounding auditor independence. These metaphors, particularly the metaphor of independence as separation, create problems in conceptualizing independence concepts. How can you discuss appropriate relationships when your basic concept is one of separation, or no relationship? On the other hand, relational concepts of independence are also flawed if they are not based on a firm moral foundation. We suggest how the profession can act to rebuildits moral foundation through recognition of collective responsibility. (shrink)

The community has legislatively conferred on external auditors a special but lucrative responsibility to provide fair and independent opinions about management''s preparation of company financial statements. In return, auditors are obliged by professional standards to act with integrity, independently and in the public interest. This study examined 174 auditors'' predisposition to provide just and fair judgements, using Kohlberg''s theory of developmental moral reasoning, one of the most widely accepted theories in justice psychology. Respondents came from five (...) international audit firms in Copenhagen. Results indicated that auditors with pre-conventional or low level of just reasoning or comprised 64 respondents, the largest group in the sample. The pre-conventional level suggests that people will act in their own self-interest and do the right only to avoid punishment. Pre-conventional auditors have the ability to "do deals", advantageous for business. When faced with an ethical crisis, however, auditors as this level will tend to focus on their own needs at the expense of others. The post-conventional or mid level of just reasoning comprised 59 auditors, second largest group in the sample. This level indicates that these auditors have the predisposition to act fairly on principal, particularly when faced with an ethical crisis. The conventional level or mid-just reasoning consisted of 51 auditors. People with a conventional level of just reasoning believe in law and order, the maintenance of the status quo, however they tend not to be critical of laws, nor authority even if those laws and authority are unjust or evil. (shrink)

Capitalizing on a unique setting in China where auditors disclose their prosocial activities, we examine the role that auditor social responsibility plays in shaping their performance. In one direction, behavior consistency theory implies that individual auditors exhibiting more social commitment in their off-the-job activities behave similarly during engagements, enhancing the quality of their audits. In the other direction, accounting firms’ internal structures along with external disciplinary forces mute the impact of heterogeneous auditor characteristics on their performance. In a (...) staggered difference-in-differences design, we report a significant fall in the magnitude of companies’ discretionary accruals and the incidence of financial reporting irregularities after their auditors begin contributing to social welfare, relative to companies whose auditors refrain from contributing during the same timeframe. Additional evidence implies that the higher audit quality stems from auditors better protecting their independence and improving their competence in the post-contribution period. Collectively, our results provide insights into the importance of auditors’ prosocial attitudes to their external monitoring. (shrink)

Companies’ earnings are arguably their most important financial disclosure, and corporate tactics to manage earnings can be directly constrained by audit procedures. In this article, we examine whether there is a link between companies’ earnings performance and changes in the accounting firm they choose to audit their financial statements. We find that when companies’ reported earnings just miss analysts’ expectations, they are more likely to change their auditor. Consistent with an opportunistic auditor switch, we also find that these companies have (...) lower levels of earnings quality after the change. Our results concentrate on companies with more incentive or ability to act opportunistically, including those with negative market reactions to earnings, higher levels of accruals flexibility, and weaker corporate governance. Our study advances research into the public’s interest by providing evidence of suspect auditor changes that increase auditors’ ethical conflict to maintain independence and objectivity. (shrink)

Using the original information from the identification cards of CEOs and signing auditors to hand-collect the data on CEO–auditor dialect connectedness (_CADC_), we examine the effect of _CADC_ on audit opinion shopping (_AOS_), and further investigate the moderating effect of auditor reputation. Using a sample of Chinese listed firms during the period of 2007–2019, our findings reveal that the likelihood of _AOS_ is significantly higher for firms with _CADC_ than for their counterparts. This finding suggests that _CADC_ impairs auditor (...) independence and triggers _AOS_. Moreover, the effect of _CADC_ on _AOS_ is less pronounced for _BIG10_-audited firms than for non-_BIG10_-audited firms, implying that auditor reputation attenuates the relation between _CADC_ and _AOS_. Furthermore, the above findings are robust to alternative proxies for _CADC_ and _AOS_, and our conclusions are still valid after using the Heckman two-stage regressions, the propensity score matching approach, the change model method and the regression discontinuity design to control for the endogeneity issue. Lastly, the impact of _CADC_ on _AOS_ stands only for engagement auditors, but not for review auditors. Overall, our study enriches the existing literature on _AOS_ and auditor independence. (shrink)

This study examines the effects of publication of financial statements, the risk of a takeover of the auditee and the auditee's financial position on auditors' willingness to allow material errors in financial statements in case of management pressure. The results show that all factors significantly influence auditors' willingness to allow errors in financial statements.

The Code of Best Practice produced by the Cadbury Committee on the Financial Aspects of Corporate Governance may be viewed as an ethical code in that it prescribes standards of board behaviour. The Code’s specific recommendations with regard to audit committees appear to offer a practical mechanism for the promotion of ethical behaviour through the inhibition of potentially unethical influences exerted by executive directors over external auditors. The rationale for these recommendations centres on the independence of audit committee members, (...) implying that independence is a prerequisite for ethical behaviour. This paper questions the assumptions regarding the role of independence through an exploration of conceptions of independence held by individuals involved in the activities of audit committees in major UK public limited companies. It suggests that audit committees may have an unarticulated role in providing an arena for the display of independence by the participants. This display forms a part of the ceremonial performance which builds confidence in corporate governance mechanisms. (shrink)

In this paper, we develop a typology of auditors’ virtues through in-depth interviews with nine exemplars of the audit community.We compare this typology with prescribed auditors’ virtues as represented in the applicable Code of Professional Conduct. Ourcomparison shows that the Code places a primary emphasis on mandatory virtues including the virtues of “independent,” “objective,”and “principled.” While the non-mandatory virtues, which involve “going beyond the minimum” and “putting the public interest foremost,” were identified by our exemplars as essential (...) to the auditor’s role, they received little or no emphasis in the Rules of Professional Conduct. We find this particularly alarming, given that the exemplars interviewed for this study viewed these virtues are essential to the auditors’ role. If the audit profession wishes to uphold public confidence by encouraging the possession of non-mandatory auditors’ virtues, our research suggests that non-mandatory auditors’ virtues should be explicitly described and included in rules of professional conduct. (shrink)

Fraudulent financial reporting, financial statements with errors so material as to require restatement, and biased reporting marred by defects such as managed earnings have plagued financial reporting in many countries in recent years. All of those failures are ethics failures that represent breaches of fiduciary duties by individuals who accepted responsibilities but did not fulfill them. The financial reporting system practiced in America is viewed by the parties involved in it as generally satisfactory. However, according to another view, the interests (...) of those primarily and secondarily responsible for those reports conflict with the interests of the intended beneficiaries, or users, of the corporate financial statements. A more realistic view of the actual operation of that reporting system shows that it is fundamentally flawed. Primary responsibility for failures rests with top management and financial management of the reporting corporation who are so strongly motivated to render favorable reports on their stewardship that they neglect their fiduciary responsibilities to investors. Secondary responsibility falls on independent auditors who are so heavily influenced by enterprise management that they, too, fail in carrying out their responsibilities to users of the audited financial statements. Ethics compromises are also found in the performances of academic accountants and members of accounting standards-setting bodies. The conflict between managements interest in reporting its performance in a favorable light and investors interest in decision-useful financial information will always exist and require regulation. However, changes in those regulations and in the basic governance arrangements involving shareholders, management, and auditors could reduce the opportunities and temptations for failures in carrying out fiduciary responsibilities. Most importantly, the close relationships between auditors and management must be loosened in favor of closer relationships between auditors and investors. (shrink)

The actuarial profession has a long history of providing critical expertise to society. The services delivered are some of the most complex and mysterious to outsiders of all professions but little has been written about the professional responsibilities of actuaries in the academic literature beyond that of the profession itself. This paper makes the case that the issues surrounding professional independence of actuaries are, in principle, similar to those that faced the audit profession before the scandals and resultant regulatory changes (...) early this century. It is argued that, despite the position taken by the actuarial profession and management, the status quo raises genuine concerns about conflicts of interest and independence and that the risks that arise are of sufficient magnitude that they should at least be the subject of a full debate. (shrink)

Several critics have reopened the continuing debate regarding the credibility of the auditing profession in part because of auditors' reluctance to issue warning signals to investors. At the root of auditors' lack of independence issues are conflicts of interest resulting from the structural features of auditor-client relationship. The Throughput Model is advanced to illustrate how ethical issues may be influenced by conflicts of interest. In the first stage, the TP provides an isolation of auditors' ethical positions from (...) six ethical different perspectives. In the second stage, previous TP theory is built upon by arguing a simultaneous analysis of how conflicts of interests may induce auditors' behavior. We conclude that in the current low litigation risk environment, auditors' ethical behavior is clearly ' unbalanced' favoring the reluctance to issue warning signals. Finally, we offer a discussion of potential solutions to improve ethical issues. (shrink)

The present study attempts to investigate the effect of emotional intelligence, corporate ethical values, and ethical climates on the ethical judgment of auditors in Malaysia. The study used a questionnaire survey comprising instruments on emotional intelligence, 483, 2004), corporate ethical values, 339–359, 1985), ethical climate, and ethical vignettes related to the auditors’ job, 287–306, 1971 and Cohen et al. 1994). A total 263 usable responses were obtained and analyzed using statistical tests of mean score, standard deviation, correlation, and (...) multiple regression. The results reveal that emotional intelligence and corporate ethical values significantly influenced the ethical judgment of auditors. Likewise, instrumental and independence ethical climates have significant effect on ethical judgment of auditors in Malaysia. (shrink)

Ethical issues in non-financial auditing are increasingly under scrutiny and questions have been raised about the impartiality and independence of audits. Among many other problematic issues, firms have discretion to select their assurance providers and are also required to cover the cost of the audit. Previous literature highlighted several consequences of this competitive and client-driven environment. However, research has mainly focused on firm-level investigation of the consequences—in this paper, we enhance this research by also considering assurance providers. Our approach is (...) grounded in legitimacy and institutional perspectives and we study how organizational motives and selection of assurance providers impact the benefits arising from the audit. In particular, we assume that firms select their assurance providers on the basis of audit strictness (substantial auditing) and market credibility (symbolic auditing) and we study the operational and market benefits that arise from the audit. Based on the data collected from 597 firms, we demonstrate that internal motives drive firms to be more likely to select assurance providers that offer audit strictness, while external motives drive firms to be more likely to select assurance providers that offer market credibility. The findings further show that assurance providers associated with auditing strictness have a stronger effect on operational benefits compared to assurance providers that offer market credibility. We also find that firms’ motives alone are important in driving the benefits achieved. These findings provide a basis for exploring the ethical implications of non-financial auditing. (shrink)

A study of 612 CPAs employed in four separate regions of the People’s Republic of China shows that they exhibit ethical orientations that are not significantly different from one another and that they do not, as a group identify with the Subjectivist description provided in the Forsyth et al. (Journal of Business Ethics 8(83):813–833, 2008) meta-analytic international study involving the Ethical Position Questionnaire. Confirmatory factor analysis did however establish the validity of the instrument as a measure of idealistic and relativistic (...) tendencies. It was established that the ethical tone within local accounting firms plays a significant role in forming ethical positions and that these variables together work to influence ethical judgement making with respect to issues involving independence and objectivity. The constructs of relativism and idealism act as reliable predictors of moral choice, but need to be carefully interpreted in the context of field research. The study highlights concerns about the ethicality of a fledgling group of professionals having to cope with the exigencies associated with the world’s fastest developing economy. (shrink)

This case describes the background of the whistleblower complaint, filed by Daniel Schlicksup, questioning the propriety of Caterpillar Inc.’s “Swiss tax strategy”. The Swiss tax strategy was recommended by its independent auditor, PricewaterhouseCoopers, and designed to transfer to a Swiss entity the profits earned on its sales of “purchased finished replacement parts” to foreign marketers. This strategy enabled Caterpillar to shift $8 billion in replacement parts sales to Switzerland and to avoid or defer paying U.S. taxes on that income. (...) Daniel Schlicksup, a member of Caterpillar’s tax staff, filed an Internal Revenue Service whistleblower complaint against Caterpillar and provided the IRS extensive documentation that served as the foundation for the IRS’s claim Caterpillar owed $2 billion in back taxes and penalties, potentially entitling Schlicksup to a huge whistleblower award ranging from $300 to $600 million. Careful review of this case facilitates student discussion, and enhances student understanding, of the wisdom and morality of Schlicksup’s whistleblowing activities. (shrink)

When the state buys and then provides to the citizens goods and services, the state may certainly choose to audit, independently and comprehensively, the quality of the goods and services so provided, particularly when citizens are reporting back that the goods or services are causing unwanted, deleterious effects. This principle applies to intellectual property -- information -- education -- as well as to other goods and services. In particular, it applies to the theory of evolution as taught by the state (...) in its schools, colleges, and universities. A substantial public has long expressed concern; and the state may properly respond to that concern. Naturally, the state would never allow the vendor of goods and services to dictate that only its employees, or others whom it effectively controls, may be allowed to conduct audits. Indeed, persons substantially subject to the control of the vendor are the last possible choices to serve as independent auditors. The conflict-of-interest is well-recognized regarding information and opinion services: a huge problem arose with the big national auditing firms when they also established management consulting divisions -- the auditors tended to report favorably about companies and projects on which their own management consultants were involved. Yet the science community quite bluntly and openly proclaims that only its members -- persons it controls -- may function as auditors of the quality of scientific statements and propositions. They do this by asserting that only scientists may declare what is, or is not, scientific. Now it may be true that within any company, only employees of that company may properly develop the products that the company sells, and only they may deliver the company's statements regarding the quality of its own products. But when a company sells its products outside of itself, to others, such as the government, it may not impose as a condition of sale that only its employees may continue to render opinions about the quality of the product. When the science community actively urges the government to take-up and re-distribute its product, it necessarily surrenders any claim to a monopoly over auditing the product. A difficulty of conducting truly independent audits of science product vended to the government for delivery to the people lies in the fact that to-date, there is no systematic program of developing and training people to serve as such independent auditors. The closest group of people to rely on for this would be lawyers who, in litigation, have developed the ability to cross-examine expert witnesses in cases such as patent cases, or product-liability cases, or other litigations that involve expert testimony in advanced academic fields. This paper outlines a program by which states can conduct appropriate independent audits of evolution as vended to the state by the science community. (shrink)

Previous accounting ethics research berates auditors for ethical lapses that contribute to the failure of Andersen (e.g., Duska, R.: 2005, Journal of Business Ethics 57, 17–29; Staubus, G.: 2005, Journal of Business Ethics 57, 5–15; however, some of the blame must also fall on regulatory and professional bodies that exist to mitigate auditors’ ethical lapses. In this paper, we consider the ethical and economic context that existed and facilitated Andersen’s failure. Our analysis is grounded in Akerlof’s (1970, Quarterly (...) Journal of Economics August, 488–500) Theory of the Market for Lemons and we characterize the market for audit reports as a market for lemons. Consistent with Akerlof’s model, we consider the appropriateness of the countervailing mechanisms that existed at the time of Andersen’s demise that appeared to have effectively failed in counteracting Andersen’s ethical shortcomings. Finally, we assess the appropriateness of the remedies proposed by the Sarbanes–Oxley Act of 2002 (SOA) to ensure that similar ethical lapses will not occur in the future. Our analysis indicates that the SOA regulatory reforms should counteract some of the necessary conditions of the Lemons Model, and thereby mitigate the likelihood of audit failures. However, we contend that the effectiveness of the SOA critically depends upon the focus and attention of the␣Public Companies Accounting Oversight Board (PCAOB) towards assessing the ethical climates of public accounting firms. Assessments by the PCAOB of public accounting firm’s ethical climate are needed to sufficiently ensure that public accounting firms effectively promote and maintain audit quality in situations where unconscious bias or economic incentives may erode the public accounting firm’s independence. (shrink)

Two types of guanxi have a close association with auditor independence in China: firm-level connections derived from state ownership and personal connections developed through management affiliations with external auditors. This article examines the effects of these two types of connection and their joint effect on audit quality. We find that state ownership and management affiliations with the external auditor both increase the probability of receiving a clean audit opinion in China. Furthermore, the probability increment brought by management affiliations for (...) non-state-owned enterprises (NSOEs) is greater than that for state-owned enterprises (SOEs). These results suggest that state ownership and management affiliations are two important types of connection that impair auditor independence, and that management affiliations are of greater importance to private-sector firms than to SOEs. (shrink)

Traditionally, certified public accountants (CPAs) have served a unique role in the world of commerce and the profession of accounting. They perform an attest function and thereby serve as the chief providers of relevant, high quality accounting information to the decision making public. CPAs are licensed practitioners, who as expert independent accountants express opinions about an entity'sfinancial statements. Their license provides them with the exclusive right to perform this attest function. This monoploy relies on the concept of independence that (...) is the normative standard of accountancy. It is this perceived independence of auditors which provides credibility, reliability and trust in the financial accounting information upon which stakeholders depend to make informed decisions. Now, however, we see the environment in which CPAs operate undergoing rapid change. Both the globalization of business operations and technological advances have radically changed how and where accountants work and the speed at which things happen. The very nature of accounting information services is evolving; moving from a concentration on audits to an increasing reliance on consulting and assurance services. New ethical issues have been raised by this confluence of changes in the accounting environment. Noteworthy is that the application of the principle of independence by CPAs has been called into question by no other than the SEC. Are those stakeholders who depend upon the independence of CPAs at risk? The influence of insiders has significantly increased as accounting firms perform multiple tasks for the same clients. This paper discusses the different groups who can potentially impair the independence of auditors and the steps that are being taken to enhance the "independence" of the auditors. (shrink)

Audit standards require auditors to conduct audits being independent in mental attitude from their clients. Regulators and financial statement users are concerned that auditors compromise their independence by allowing clients that contract for consulting services, i.e., non-audit services, more financial statement discretion relative to clients that demand relatively little non-audit services from their auditor. This paper begins by discussing the role of auditing in the capital markets and the various stakeholders that rely on audited financial information in (...) making their capital allocation decisions. The paper continues by explaining the ethical dilemma inherent in audit contracts in general, and more specifically, how the provision of non-audit services threatens auditor independence. The paper concludes by summarizing research studies that report conflicting evidence that there is a violation of auditor independence due to the provision of non-audit services to audit clients. (shrink)

The paper provides an introduction to some of the professional ethical dilemmas facing an accountant in the United Kingdom. The first part deals with those dilemmas which accountants would normally accept are covered by the term ethics. These include the problems associated with adequately fulfilling a duty to shareholders and conflicts of interest (including whistleblowing) by the accountant acting as independent auditor or as an employee. The second part deals with wider aspects of ethical dilemmas stemming from reconciling the (...) implicit understanding that the accountant is being objective with the fact that accounting rules make it very difficult to sustain that objectivity. (shrink)

Internal audit provides an independent and objective opinion to the Board on risk management, control and governance, by measuring and evaluating their effectiveness in achieving an organisation’s agreed objectives. It also provides an independent and objective consultancy service to help line management improve the organisation’s processes. Internal auditors should respect in their work some ethical rules, especially these included in the Code of Ethics formed by the IIA. This code is intended to clarify the standard of conduct (...) expected from all members of the internal audit unit. The main four principles that should be observed are as follows: integrity, objectivity, competency and confidentiality Being ethical in internal audit is necessary in order to win the trust of the environment in which auditors work. However, declaring one’s readiness to respect the Code of Ethics is not enough. Much more important is to implement and comply with given rules in carrying out audit duties. (shrink)

External auditors owe a professional duty to the company''s stockholders and to society in general. However their remuneration is determined by management. The resulting conflicts of interest are particularly acute in distressed companies where the auditors are required to disclose uncertainties regarding future survival. We focus on the consequentialist self-fulfilling prophecy argument whereby auditors may fail to disclose such uncertainties due to the belief that the disclosure itself would precipitate the company''s bankruptcy. We find no empirical support (...) for such beliefs for a sample of distressed U.K. companies with audit reports published between 1986 and 1993. Companies whose auditors disclose going concern uncertainties are no more likely to fail than those without such disclosures; indeed three out of four reports containing going concern uncertaintiesare not followed by failure before publication of a subsequent set of accounts. Instead we find that it is the degree of financial distress that drives both bankruptcy and the auditor''s going concern disclosure rather than that the disclosure itself causes failure. Belief in the self-fulfilling prophecy effect nevertheless persists, and this despite the profession''s clear ethical guidelines that audit opinions should provide an objectively true and fair view, paying no regard to possible consequences. It may be that the continued attractiveness of the self-fulfilling prophecy belief is due to its providing a means of resolving intense auditor/management conflict in what is a particularly complex decision situation. We argue that, if the profession''s clear ethical guidelines are to play a greater role in this area, issues such as enforcement will need to be addressed. (shrink)

En República, libro X, Platón justifica su exclusión de la poesía imitativa mediante argumentos metafísicos y psicológicos. Al hacerlo, enfatiza la distancia de los productos de la imitación respecto de la verdad, y los condena porque apelan al elemento inferior del alma. En Sofista 233d- 236c, se propone una crítica similar contra la sofistería. El imitador puede hacer eidola, que puede ser considerado como real por un ignorante. En ambos casos Platón se refiere a la distancia respecto de la verdad (...) que guardan tanto los objetos hechos por los imitadores –pintores, poetas o sofistas– como los destinatarios de tales artes –espectadores u oyentes–. Los paralelismos entre ambos tratamientos son abundantes. Tal «distancia», como tratamos de mostrar, ofrece una clave no sólo para entender la crítica platónica de la mímesis, sino que también arroja luz sobre algunos pasajes de República cuya conexión con el tratamiento de la imitación no es evidente de inmediato: la sección eikasía de la «línea dividida», así como ciertos pasajes de la alegoría de la caverna. Ambos textos, independientemente de las variadas lecturas e interpretaciones que han merecido, aclaran la naturaleza de la mimesis y las críticas de Platón contra ella. Además, testifican la confianza de Platón en que el contacto directo con lo real neutraliza los efectos perniciosos de la imitación Palabras clave: Mímesis; Verdad; DistanciaIn Republic Book X, Plato justifies his exclusion of imitative poetry by means of metaphysical and psychological arguments. In doing that, he emphasizes the distance from truth of the products of imitation, and condemns them because they appeal to the lower element of the soul. In Sophist 233d-236c, a similar critique is directed against sophistry. The imitator can make eidola, which can be taken by an ignorant as being real. In both cases Plato refers to the distance that both the objects made by imitators –painters, poets or sophists– and the recipients of such arts –spectators or auditors– have from truth. The parallelisms between both treatments are abundant. Such «distance», as we try to show, offers a key not only to understand Platonic criticism of mimesis. It also throws light on some passages of Republic whose connection with the treatment of imitation is not immediately evident: the eikasía section of the «divided line», and certain passages of the allegory of the cave. Both texts, independently of the various readings and interpretations they have deserved, clarify the nature of mimesis and Plato’s criticisms against it. In addition, they testify Plato’s confidence that direct contact with the real neutralizes the pernicious effects of imitation. Keywords: Mimesis; Truth; Distance. (shrink)

Organisations increasingly use automated decision-making systems (ADMS) to inform decisions that affect humans and their environment. While the use of ADMS can improve the accuracy and efficiency of decision-making processes, it is also coupled with ethical challenges. Unfortunately, the governance mechanisms currently used to oversee human decision-making often fail when applied to ADMS. In previous work, we proposed that ethics-based auditing (EBA)—that is, a structured process by which ADMS are assessed for consistency with relevant principles or norms—can (a) help organisations (...) verify claims about their ADMS and (b) provide decision-subjects with justifications for the outputs produced by ADMS. In this article, we outline the conditions under which EBA procedures can be feasible and effective in practice. First, we argue that EBA is best understood as a ‘soft’ yet ‘formal’ governance mechanism. This implies that the main responsibility of auditors should be to spark ethical deliberation at key intervention points throughout the software development process and ensure that there is sufficient documentation to respond to potential inquiries. Second, we frame AMDS as parts of larger sociotechnical systems to demonstrate that to be feasible and effective, EBA procedures must link to intervention points that span all levels of organisational governance and all phases of the software lifecycle. The main function of EBA should, therefore, be to inform, formalise, assess, and interlink existing governance structures. Finally, we discuss the policy implications of our findings. To support the emergence of feasible and effective EBA procedures, policymakers and regulators could provide standardised reporting formats, facilitate knowledge exchange, provide guidance on how to resolve normative tensions, and create an independent body to oversee EBA of ADMS. (shrink)

Our study contributes by providing new insights into the relationship between the individual levels of the antecedents and how the intention of whistleblowing is moderated by perceived organizational support, team norms, and perceived moral intensity. In this paper, we argue that the intention of both internal and external whistleblowing depends on the individual-level antecedents [attitudes toward whistleblowing, perceived behavioral control, independence commitment, personal responsibility for reporting, and personal cost of reporting ] and is moderated by POS, TNs, and PMI. The (...) findings confirm our predictions. Data were collected using an online survey on 256 Indonesian public accountants who worked in the audit firm affiliated with the Big 4 and non-Big 4. The results support the argument that all the antecedents of individual levels can improve the auditors’ intention to blow the whistle. The nature of the relationship is more complex than analysis by adding moderating variables using the Partial Least Squares-Structural Equation Modeling approach. We found that POS, TNs, and PMI can partially improve the relationship between the individual-level antecedents and whistleblowing intentions. These findings indicate that the POS, TNs, and PMI are a mechanism or that attribute is important in controlling behavior. (shrink)

Today''s business students have grown up in a society where distinctions between right and wrong have become blurred and where unethical behavior is observed and even expected in high-profile leaders. Especially troubling is the impression educators have that many students no longer view cheating as morally wrong (Pavela and McCabe, 1993). By contrast, the general public is demanding higher ethics of businesspeople. In this environment, educators are challenged to instill ethical norms in business students, especially when recent research indicates that (...) students intending to enter business fields are more likely than any other group of students to engage in cheating and other forms of academic dishonesty (McCabe and Trevino, 1995). One of the major future roles of accounting students depends on their honesty, however. For audits to have economic value, the auditors must be perceived by the public as acting with independence, integrity, and objectivity. Public accountants have adopted a Code of Professional Conduct in order to protect the integrity of the profession. In an effort to teach accounting students the importance of ethical professional conduct, the author has developed a class project wherein groups of students write proposals for a student honor code at Niagara University. (shrink)

We investigate the justifications provided by the Public Company Accounting Oversight Board when sanctioning audit firms and individual auditors, as disclosed in the publicly released Settled Disciplinary Orders. Employing responsive regulation theory, we seek to gain an understanding of violating behaviors by audit firms and individual auditors that attract regulatory responses ranging in nature from persuasive to punitive sanctions. Using 298 SDOs issued by the PCAOB from 2005 to 2020, we find that the frequency and severity of PCAOB (...) sanctions at the firm level are positively associated with auditing standards violations, independence issues, and reckless behavior. At the individual auditor level, integrity violations and reckless behavior are positively associated with the frequency and severity of PCAOB sanctions. Our findings indicate that significantly higher financial penalties for individual auditors arise from manipulation of audit evidence. Further, the PCAOB financially penalizes Big 4-affiliated auditors and firms significantly more than their non-Big 4 counterparts. Other factors such as multiple individuals being implicated in an SDO and whether a firm and individual are both implicated in the SDO are important considerations in sanction imposed by the PCAOB. Overall, our findings suggest that the PCAOB adopts a responsive enforcement strategy when monitoring the auditors in their ethical and audit compliance efforts. (shrink)

Fraud in Europe is complex and well organised: it crosses organisational and geographic boundaries. The policing of fraud, on the other hand, is characterised both at national and transnational levels by fragmentation and divided accountability. This paper considers the issues involved in combating fraud in European institutions and spending programmes. It discusses the roles of those bodies with transnational responsibilities such as UCLAF , the European Fraud Prevention Office and the European Court of Auditors. The paper considers the difficulties (...) associated with the Corpus Juris proposals for a single European legal area to facilitate the fight against fraud related to the European Budget. It concludes that the task of policing Europe is hampered not only by the diversity of national political and jurisprudential systems, but also by the weakness and lack of independence of the transnational institutions. (shrink)

Moral Seduction Theory suggests that auditors are morally compromised by the perceived consequences of their opinions. The root of the auditing problem appears to result in an unintentional bias rather than in dishonesty. Although important accounting reforms have been taken to deal with auditors' trustworthiness, their lack of independence has not been adequately addressed. The new regulation (Sarbanes-Oxley Act) is a consequence of an incorrect understanding of the main true source of auditor's biases. We have developed a cognitive (...) approach by connecting the Throughput Model (TM) to the Moral Seduction Theory. This approach allows a better understanding of how conflicts of interest lead auditors to avoid the issuance of warning signals to stakeholders. We have tested our model by conducting a hypothetical scenario with eighty experienced auditors from international accounting firms. Our results confirm auditors' unintentional reluctance to issue qualified audit opinions alerting investors due to their fear of precipitating clients' final bankruptcy. The main implication is that, more than a regulation, effort should be made in monitoring those conflicts of interest to reduce unintentional bias. (shrink)

This study investigates the key factors that elicit financial reporting fraud among companies in Malaysia. Using enforcement action releases issued by the Security Commission of Malaysia and Bursa Malaysia, we identify a sample of 76 firms that had committed financial reporting fraud during the period of 1996–2016. We use the fraud triangle framework and the Malaysian International Standards on Auditing 240 to identify the factors. Since the simple probit model fails to address the identification problem, we estimate our results using (...) a bivariate probit model. The new model estimates the effects of pressure, opportunity, and rationalization on the probability of fraud likelihood by disentangling the detection probability of fraud. Among several proxies used for pressure, our results suggest that aggressive tax reporting and financial difficulties increase the likelihood of fraud commission. In regard to opportunity, we find that dedicated institutional investors, independence of the board, effective audit committee, and the presence of a female on the board provide active monitoring and oversight in reducing fraud occurrence. Results for rationalization suggest that prior violations and frequent changes of external auditors increase the chances of fraud occurrence. This research offers possible insights to auditors, managers, and regulators to prevent, detect, and react to fraud. Specifically, it highlights the specific factors that may exacerbate the fraudulent intentions of firms. (shrink)

We present an ideal profile of an emerging organizational function: the Ethics Officer. We argue that the main contribution of an EO is to provide management with a broad perspective of the organization's stakeholders – one that emphasizes the interests of all stakeholders, including those not affiliated with the dominant coalitions in the organization. In order to avoid turning the EO into a rubber stamp for management activities, we suggest that certain conditions prevail to enable the person in this position (...) to exercise impartial, independent judgment. These conditions are embodied in our profile, which maintains that an ideal EO should have appropriate organizational status, functional independence, professionalism, knowledge of organizational issues, and knowledge of ethics theory. We suggest that the function of EO may be performed by a professional who is already employed by the organization, and we use the internal auditor as an example. (shrink)

The American Institute of Certified Public Accountants (AICPA) is responsible for the Code of Professional Conduct that governs the actions of CPAs. In 1988, the Code was revised by the AICPA, but a number of issues still remain unresolved or confounded by the new Code. These issues are examined in light of the profession''s stated commitment to the public good, a commitment that is discussed at length in the new Code.Specifically, this paper reviews the following issues: (1) client confidentiality and (...) whistleblowing, (2) limited liability, and (3) auditor independence. We argue that, in each of these areas, the AICPA promotes a position that is potentially harmful to the public good. (shrink)

The study aims to find out the impact of audit quality on the financial performance of the chemical company sector, to explore how audit quality, especially focus on auditor independence and the size of the audit committee, affects the financial performance (ROA, ROE, EPS) of the Jordanian chemical industries sector listed on the Amman Stock Exchange. In order to examine the data a questionnaire was distributed to study sample consists of (59) employees working within chemical companies, (48) from it valid (...) for statistical analysis where the number of chemical companies reached (8). Ordinary Simple Linear regression method employed in the analysis of data. The study revealed that auditor’s independence has a positive and significant effect on financial performance of Chemical Company Sector. It was concluded that aspect of audit quality influence financial performance of Chemical Company. The study recommended Auditor’s independence should be increased greatly in order to enhance financial performance (ROA, ROE, EPS) of the Chemical Company Sector, by improving internal control of the company, also, Always Conduct integrity and appropriate usage tests for auditors. Shareholder should control the committee size, by controlling the audit committee members, which will reflect positively on the audit report quality. (shrink)

In recent years, new forms of transnational regulation have emerged, filling the void created by the failure of governments and international institutions to effectively regulate transnational corporations. Among the variety of initiatives addressing social and environmental problems, a growing number of certification systems have appeared in various sectors, particularly agrifood. Most initiatives rely on independent third-party certification to verify compliance with a standard, as it is seen as the most credible route for certification. The effects of third-party audits, however, (...) still need to be empirically investigated. This article provides a critical assessment of the notion of ‘evidence’ which is at the heart of auditing practices. It focuses on the case of the Roundtable on Sustainable Palm Oil (RSPO) and fieldwork carried out in Indonesia, the world’s largest producer of palm oil. In this country, some non-governmental organizations decided to participate in the RSPO in order to use this platform to tackle the issue of land conflicts. They managed to include important clauses regarding indigenous and land rights in the RSPO standard. In practice, however, auditors rarely recognize as valid evidence the forms of proof put forward by local communities. As a result, the whole process risks compounding local power imbalances. (shrink)