Statutory Auditors’ Independence in Protecting Stakeholders’ Interest

Statutory auditors play an important role in verifying and authenticating the financial statements of a corporate enterprise in order to protect stakeholder interests. Statutory auditors’ work is perceived to be reliable if they are independent of the management of the corporate enterprise. However, in cases of corporate failure, the ensuing investigations unearthed possible lack of independence in statutory auditors that could have been one of the causes behind disastrous consequences faced by stakeholders. In this context, this chapter identifies the specific focus of the present study and points out a few questions that need answering. Existing literature in the area is reviewed and gaps are identified that help formulate the objectives of the present study. In order to meet those objectives, a comprehensive methodology and detailed chapter plan are set out.

In this chapter, the main objective is to conceptually review the regulatory framework for statutory auditors in select countries that make a significant contribution to world GDP. The focus is on the requirement that these auditors be independent. The countries selected are the USA, the UK, China, India and Germany. A comparative study of their regulatory structures is made based on certain parameters. In each of these countries, the regulatory structure is monitored by central government, professional institutes, financial market regulators and, in some cases, a separate audit regulator. These regulatory bodies issue pronouncements in the form of company law, professional regulation, codes of ethics, and auditing and quality control standards which establish the basic guidelines within which a statutory auditor must operate. In all of these regulations, the independence of statutory auditors is predominant. The enforcement of existing regulation is made through continuous inspections or prompt disciplinary action.

In this chapter, an attempt has been made to critically review statutory auditor independence in five high profile accounting scandals selected from each of the five select countries and to conduct a comparative analysis of them. The five scandals occurred at Enron, Polly Peck International, Satyam, Zhengzhou Baiwen and ComRoad AG. The analysis shows that a lack of professional scepticism of statutory auditors is a major sign of impaired independence in a corporate failure. Fundamental issues governing audit procedure, such as appointment, remuneration, non-audit services, tenure, the role of the audit committee, the role of audit inspection mechanisms and the disciplinary framework have always played a significant role in controlling statutory auditor independence in each of those corporate accounting scandals. Hence, every time a scandal occurred, these fundamental issues were revisited by the regulatory authorities.

This chapter identifies and discusses certain issues influencing statutory auditor independence in corporate accounting scandals based on a review of literature and legal case judgments. The opinions of informed and experienced respondents have been collected through a structured questionnaire and statistically analysed. The methodology is outlined in this chapter. It is observed that different categories of respondent have expressed concern and identified issues that erode statutory auditor independence. Such issues include laxity in the present regulatory environment, an unholy nexus created between statutory auditor and company management in the course of engagement, the process of appointing statutory auditors, uncontrolled remuneration and provisions of non-audit services to the audit client. However, there is wide disagreement on these identified factors among respondents from different occupational backgrounds. Based on their opinions on identified factors, two groups of respondents emerge: a smaller group comprising professional accountants believe that statutory auditor independence is mainly governed by internal environment and audit procedure, and a larger group comprising academics, students, corporate personnel and investors who sees the external environment as having considerable influence on the accountability of statutory auditors. The observations of these two distinct groups represent two completely different dimensions of factors that influence statutory auditor independence.

This chapter presents a conceptual discussion of the ‘Ethical Responsibility of Statutory Auditors in the Backdrop of Corporate Accounting Scandals’. Respondents to the fieldwork discussed in Chap. 4 identified a number of key variables that impact on the ethical responsibility of statutory auditors. In this chapter, their opinions on those variables are analysed in order to draw some salient conclusions on this particular theme. Five major factors are identified which play an important role in impacting the ethical responsibility of statutory auditors, of which the ‘regulatory framework and recent events’ is believed to be the most significant. The theme of ethical responsibility is represented by four key distinct dimensions: (a) existing regulation and its inherent limitations, (b) behavioural improvements, (c) global and social approach, (d) education and training in ethics. In this chapter, the opinions of different occupational categories are critically evaluated. While professional accountants (chartered accountants and cost and management accounts) tend to place emphasis on ‘Practical Approaches of Education on Ethics to Professionals’, respondents from the academic fraternity, whether students or academics, give maximum importance to ‘Increasing focus on Ethics in Education’. Investors, who are the major impacted party of statutory auditors’ lack of ethical responsibility, emphasize punitive action and the inner values of statutory auditors. Corporate executives, finally, see the key governing factor of ethical responsibility as the regulatory framework and recent events.

This chapter presents an empirical study on opinions of respondents including chartered accountants (CAs) and students pursuing chartered accountancy courses on select issues (in the form of statements in a structured questionnaire) relating to the quality control procedures for statutory financial audits and draws some conclusions on this theme. The research reveals that there are 21 factors governing the quality control procedures for statutory financial audit. Of these factors, a ‘nexus with management and negligence in duty’, ‘professional scepticism and physical inspection’, ‘role of accounting firm in designing quality control procedures’ and ‘engagement quality control review’ have significant influence. The theme as a whole is organized into two distinct dimensions: (a) ‘input factors to quality control procedures of audit in ensuring audit quality’, (b) ‘process factors to quality control procedures of audit in ensuring audit quality’. While the majority of the CAs consulted in the survey associate with ‘process factors to quality control procedures of audit in ensuring audit quality’, most students identify more closely with the ‘input factors to quality control procedures of audit in ensuring audit quality’.

The concluding chapter presents a summary of findings of previous chapters followed by suggestions based on current research. Finally, proposals for further research are identified. The chapter reveals that Indian regulators of the accounting and auditing profession have already taken significant steps to improve statutory auditor independence through regulatory reforms, improving ethical responsibilities and modifying quality control procedures. However, gaps and inconsistencies remain. The importance of strict disciplinary actions to ensure regulatory compliance by statutory auditors cannot be ignored, and while new measures may actually instigate for the auditor independence of appearance, this is only one half of picture. Achieving independence of mind in auditors is only possible through nurturing their inner value sense. The sustained efforts of professional institutes and industry bodies to bring ethics into accounting education, increase awareness, orientation and training and introduce recognition schemes to reward good ethical practice might be successful in making statutory auditors more ethically conscious and in touch with their inner value sense. This book recognizes that what is required is both these dimensions. It is only with both regulatory compliance and a real inner value sense that statutory auditors will be able to protect their independence and in turn safeguard stakeholder interests in the future.