Auditor Independence: Consequences of the Regulation

Wasaf Khan & Morad Boiaala

Student thesis: Master thesis

Abstract

This thesis is based on the actions of the European Commission's introduction of mandatory rotation and the prohibition of certain non-audit services, as well as the restriction of 70% of non- audit services, which has affected the accounting profession. Back in 2010, the requirements for the regulation were introduced as part of the Green Paper “Audit Policy: Lessons from the Crisis". The European Commission considered it necessary to restore the stakeholders' confidence to the
auditors after the financial crisis and to achieve financial stability in the future as well.
Independence is the most important part of the auditor’s role when they audit companies, but also because the public expect that from them. At the same time the auditor is the companies most preferred adviser to improve the company, which in some cases can raise doubts about the auditors’ independence. This creates a paradox, and as for the auditors they must ensure that the company accounts does not contain material misstatements as an objective third person, while advising the same companies for their benefit with the insight and knowledge they have in the companies. The public meant that a thorough and clean audit was the solution to restore confidence in the market. European Commission introduced mandatory rotation, which is divided into partner rotation and firm rotation, with the aim of strengthening the independence by avoiding long-term relationships between the client and the auditor, as well as to increase the objectivity and dynamics of the audit industry to promote competition. Moreover, the prohibition of certain non-audit services and a 70% restriction of other non-audit services have broken the confidence of stakeholders since it leads to the suspicion of the auditors’ independence.
The companies of public interest entities are of major importance to stakeholders and society, for the reason that they have a greater influence on their surroundings. If the accounting information of the companies is published with significant misstatements, it can cause fatal consequences for stakeholders and societies, which in worst scenarios will result in bankruptcies.
The actions of the EU Commission of mandatory rotation as well as the prohibition and restriction of non-audit services, will be analysed and the impact it will have on the audit firms as well as for the auditor's independence and quality.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2017
Number of pages126