1. Importance of Audit Independence for Stakeholders
The significance of audit independence can be divided into four categories: For starters, audit independence can help maintain public trust and eliminate potential conflicts of interest. Second, audit independence can assist auditors in delivering high-quality financial reports and avoiding scandals such as the “Enron bomb.” Third, the emergence of no-audit services makes maintaining audit independence more difficult, but also more vital. Finally, audit independence can help managers formulate strategies and improve the quality of their audits.
Financial reports are used by stakeholders to make economic decisions. It’s unclear whether such reports are related and trustworthy. Auditing can assist in resolving this issue. Auditors, on the other hand, fall short of their responsibilities if they are unable to maintain independence during the auditing process. On the one hand, report users may be skeptical of this form of reliance if they believe the auditor and consigner are from the same party. When an auditor, on the other hand, is unable to maintain an objective perspective, the auditing opinion is likely to be incorrect. For example, an auditor may overlook the fact that the data is manipulated and offer an unqualified conclusion. This result has the potential to mislead users of linked reports who are making decisions. They may suffer a loss as a result of relying on this audit opinion. Because the circumstance differs from one Stakeholder to the next, the following analysis of the necessity of maintaining physical and mental independence is based on diverse Stakeholders.
2. Importance of Audit Independence for Shareholders
Shareholders are the direct beneficiaries of businesses, and if the businesses succeed, they will receive larger compensation. As a result, shareholders place a high value on audit independence. Actually, when a company is performing poorly, controlling shareholders are unwilling to reveal the facts, which harms minority shareholders’ interests. The Entrenchment Effect is a situation in which controlling owners have little incentive to hire high-independence auditors.
Because the shareholders’ rights are distinct from the management rights, owners are not involved in the day-to-day operations of the business. They hire others to run their business and benefit from it. Typically, shareholders are concerned with profitability, efficiency, continuing operations, and solvency, among other things. These indices represent how successfully the company is run by the manager. Shareholders can also use the data to evaluate the performance of managers. In general, they get their information from the reports that managers prepare. However, because it is the manager who creates the reports, there is a chance that they will be falsified. It’s possible that managers fabricate the report to hide their mistakes, poor performance, or other instances in which they fail to meet their responsibilities. Currently, auditors’ work is assisting in answering the question of how much report readers may rely on the report information. However, if the auditor is unable to maintain independence, report users are likely to have doubts about the audit conclusion. Clearly, an audit loses its value in this situation. Report users are unable to obtain meaningful information about the company’s state and managers’ performance without an unbiased and objective audit opinion. Once shareholders lose control of the company, this business mechanism will undoubtedly devolve into chaos, as managers will most likely seek personal gain by exploiting owners’ resources and authority, regardless of regulatory and legal constraints. The company will most likely go into liquidation or bankruptcy in the end.
3. Importance of Audit Independence for Creditors
Debtor-creditor relationships are quite widespread and necessary nowadays. Debtors seek to borrow money to expand their output or expand into new markets, while creditors want to earn interest on their excess cash. The creditors’ main concern is the debtor’s ability to repay the obligation. The debtor’s financial records can provide certain information, such as ratios, that can demonstrate the debtor’s ability to pay back the debt. In addition, if the company has a poor financial performance, creditors may consider calling in a loan before it expires to ensure that their money is protected. Those reports, on the other hand, are filed by the debtor. As a result, creditors may question whether the debtor is providing incorrect information in order to defraud creditors or hide the fact that they are unable to repay the money. At this point, the efforts of the auditor can either erase or alleviate this doubt. However, auditing will not be successful if the auditor is unable to maintain independence while completing the audit. Due to the rejected audit opinion, creditors are likely to make erroneous judgments. When a creditor lends money to an unqualified debtor, it is likely to accumulate a large number of bad accounts and hazardous assets as a result. As a result, audit independence is critical to creditors in order to deliver accurate financial reporting.
4. Importance of Audit Independence to Government
When a corporation works within a single country, it takes advantage of the government’s infrastructure construction and investment climate. It should take up the burden of taxation. Companies’ financial statements are used by the government to determine whether or not to levy and how much to levy. For example, business taxes are calculated using the company’s gross income, which can be found on the income statement. Also, income tax is calculated using the profit from the income statement. If a corporation falsifies financial figures to save money on taxes, the government will bear the brunt of the consequences. As a result, in the event of tax evasion, the government will undertake an audit.
5. Importance of Audit Independence for Operators
Many people may believe that the auditor is an enemy of the operator (in this case, the manager) and that auditing is a roadblock. This concept is only a sliver of the whole. The purpose of auditing is to strengthen reliance on information and to ensure that all corporate actions are in compliance with the law. To some extent, it aids in the acquisition of superior management. Auditors are sometimes able to offer solutions to existing management issues. For example, the internal control system may have a flaw, resulting in a circumstance where the company’s entire benefit is jeopardized. Going into more detail, the regulation’s design may allow for embezzlement. Or an auditor discovers that certain employees are breaking the rules. Cases like this should draw the attention of managers to the need for better management. If the auditor is unable to maintain independence when performing audits, it will represent a risk to the company, potentially causing damage to the company’s benefits. The auditor, for example, is the cashier’s brother. When this auditor performs an audit to cash, he is unable to maintain his independence, or his independence has been compromised. If the cashier was guilty, he may hide the information and provide an unqualified opinion. Managers are oblivious to the threat because of this viewpoint. It may have a negative impact on their work performance and company growth.
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