Why Is It Important for External Auditors to Be Independent? Relate Your Answer to the Primary Role of External Auditors. Give Examples of Specific Ways the Lack of Auditor Independence May Impact Adversely on an Audit.

1662 words 7 pages
Name: Nguyen Thi Hong My
Library card number: 33237972
Word count: 1304 words

AcF 100 Introduction to Accounting and Finance
Lent Term: Individual Coursework Essay

Topic: Why is it important for external auditors to be independent? Relate your answer to the primary role of external auditors. Give examples of specific ways the lack of auditor independence may impact adversely on an audit.

In 2001, there was an event that had shaken the whole business world. The crash of Enron in US, followed by worldwide collapse of its auditor, Arthur Andersen. It was a greatest corporate failure uncovered in business history. Follow the Enron-Andersen scandal, massive organizations like WorldCom, Xerox and Waste Management
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Thus, it is strongly suggested that the discussion of audit independence must be concerned with the cost of attaining diverse degree of independence. This cost is the key component in optimizing the contribution to the cost effectiveness of capital markets by audit independence (Elliott and Jacobson, 1998).

The government audit system in China, National Audit Office (NAO), is one of the examples that suffers from the lack of the audit independence. It significantly contributes towards China's economic, reforming and opening up to the world in the past 20 years (Chinese Auditing System Research Group, 1999). The problems of NAO stem from it being under direct control of the executive body (State Council). Various government departments and officials interfere with government auditing, thus, weakening the objectivity and fairness of an audit. The repercussion is NAO will be less likely to gain trust and acceptance by people's congress and the public (Yang, Xiao and Pendlebury, 2008).

As it mentioned above about the failure of Andersen, the major reason is the lack of independence of audit. Andersen's lucrative role in the business and the close personal relationship with Enron throughout their long period of working together compromised the independence of Andersen (Consumer Federation of America, 2002). That is why David Sinclair, who is the policy officer at Charity Finance Directors' Group (CFDG) says “Choosing and managing audiors is becoming more topical