Academic journal article IUP Journal of Corporate Governance

Statutory Auditors' Independence in the Protection of Stakeholders' Interest: A Perceptual Study

Academic journal article IUP Journal of Corporate Governance

Statutory Auditors' Independence in the Protection of Stakeholders' Interest: A Perceptual Study

Article excerpt

Introduction

The operating result of a business enterprise for a financial period is reflected through its profit and loss account, balance sheet and other financial reports prepared according to applicable Generally Accepted Accounting Principles (GAAP) (Banerjee, 2002). Stakeholders of the business take their financial decision based on these statements. But sometimes unholy intentions showing an inflated financial position induce the management of an enterprise to manipulate their financial statement. It even calls for the company's demise, impacting most of its stakeholders. Therefore, authenticity and reliability of financial statement should be certified by a competent authority external to the business. Statutory financial auditors perform this role. They are professional accountants appointed to review the financial statement of the company and express their opinion on 'true and fair' view of working affairs of the business (Gupta, 1999). Therefore, apart from being competent to do their job, they should also be ethical towards their professional requirement. Therefore, independence of professional accountants serving as statutory auditors are of paramount importance to the stakeholders who take their financial decision based on their report. With a view to assisting a statutory auditors to perform their duty with required integrity and objectivity, governing regulatory bodies in a country issue certain regulatory pronouncements (Bakshi, 2000). In India, Chartered Accountants perform the role of statutor y financial auditor. With a view to ensuring their independent operation as statutory auditors and achieving quality audit from them, their governing regulatory bodies (e.g., Institute of Chartered Accountants of India, Ministry of Corporate Affairs, and Securities Exchange Board of India, etc.) issue certain regulations (e.g., Code of Ethics for Professional Accountant, Standards on Auditing, Standard on Quality Control, Companies Act, 2013, Listing Requirements, etc.) that clarif y their independence requirement as a statutory auditor (Ghosh, 1999).

However, even with the presence of a strong regulatory framework we have witnessed statutory audit failure in most of the accounting scandals in different countries (e.g., Enron Corporation Ltd., Parmalat Spa, etc.). Statutory auditors in those companies failed to detect and report accounting irregularities in the company's financial statement that resulted in the company's demise, affecting the country's economy and a huge section of the society. Ensuing investigation also proved the statutory auditors' close nexus with management in some of those scandals (Copeland, 2005). In India, too, we have witnessed accounting scandals in Satyam Computer Services Ltd., where statutory auditors' independence was severely questioned (Banerjee, 2011). Naturally, this puts a big question mark over the integrity of the accounting and auditing profession. This paper seeks to analyze the opinion of statutory financial auditors and respondents from different occupational groups related with auditing profession and draw inferences on the topic.

Literature Review

Statutory auditors' independence is a matter of huge importance while ensuring reliability and authenticity of financial statements prepared by a company's management. However, in recent corporate accounting scandals, we have seen instances of statutory auditors' lack of judgement and scepticism in the audit of that company. Ensuing investigation also proved that statutory auditors were not completely independent of the management in those audit engagements. This situation instigated a great deal of concern among notable scholars all over the world and they conducted their research on this issue and identified the causes behind the lack of independence of statutory auditors and proposed certain solutions so that statutory auditors' independence could be safeguarded for protection of stakeholders' interest. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.