In this paper, the issue of independence is first outlined in order to gain what it is and why it needs to be addressed. Independence is the unbiased relationship between an accounting firm and its’ client. In this paper, it goes on to describe the standards issued by the SEC in order to mitigate the issue Of whether or not accounting firms are independent Of their clients. The paper discusses why independence is important in the accounting field by citing a well-known accounting scandal. The accounting scandal that was referenced was the Enron and Arthur Andersen incident.
Next is the proposal that should be used to correct the issues that can come with not enough independence being present. The paper outlines the three steps that will be needed to complete the transition. The first step was letting your employees know how valued you they are and how they are not easily replaceable. The next step would be to make your employees completely aware of what the change that is about to occur is and why it is happening. The more that your employees are involved the more they are going to help with the transition. The final step of the transition is the actual implementation of the proposed plan.
The final aspect of the paper is the final conclusion for this proposal. The paper sums up the issues addressed in the paper and the need for a firm’s employees to be on their side for change to happen and be successful. Firm Background During my time at Arthur Bell, the thought of whether or not some of the practices could be taken as borderline violations of the independence standard had crossed my mind. First, I’ll give a brief background of the accounting firm. Arthur Bell has been an alternative investments accounting firm since 1974.
They specialize in the areas of managed futures, securities and hedge fund. Arthur Bell provides such services as audits, tax preparation, performance analysis, and consulting services (Arthur Bell Certified Public Accounts, 2014). While at Arthur Bell I was part of multiple audits and had contact with various clients and third party administrators. The biggest thing that stuck out to me was the fact that with each audit the same engagement partner had been on the same engagement for five or more years and there was no indication that this would change anytime soon.
This raises the issue as to whether independence is truly being upheld. While sitting in on and conducting various risk assessment calls throughout my career thus far I noticed that at times the conversations can be more personal as opposed to an actual risk assessment call. The engagement partner would treat the phone call as though it were simply a formality since they had known this client for such a substantial amount of time. However, when does that comfort turn around and hurt you and become the Enron incident all over again. However, the firm does attempt to stress the fact of professional skepticism.
This relates to not blindly listening to your superiors at times and to speak up and argue if there is something that you do not agree with or if something does not look right. This in theory is a good tool for those staff that are doing the majority of the work. Unfortunately, one does not take into account that a bottom of the totem pole staff is not going to try and cause issues for their superiors. This is largely due to the fact that all employees kick to further their careers and fighting upper management would not benefit them, which would influence employees to keep their mouths shut as to not get onto anyone’s bad side.
Due to these issues is why an appropriate action plan is needed in order to successfully fix this issue with the firm as well as throughout the accounting industry. The main thing I propose is the fact that accounting partners need to rotate within the firm every three years. This would help keep the engagement partners new every three years so not only one engagement partner becomes too friendly with a particular client. Independence and Importance of Independence In the auditing field there are various rules and regulations that a worker deeds to keep in mind and follow.
One of those regulations is the matter of independence. Krishna Unworthy stated in her article, ‘that auditor independence is often referred to as a cornerstone of the auditing profession” (Unworthy, Sweethearts, & Caravans, 201 0, p. 95). This holds true since the goal of independence is to provide an unbiased review of a set of financial statements. According to the article written by Debouch independence can be broken down into typically two different parts. Those parts are what independence actually is and what the perception Of independence is (Debouch & Schwartz, 2003, p. 4). Debouch describes the independence in actuality part an auditor that is completing various aspects of an audit such as the risk assessment and the planning with an “independent mindset”( Debouch & Schwartz, 2003, p. 84). With regard to the other aspect of independence the author describes it as the auditor has to appear as independent to those outside viewers (Debouch & Schwartz, 2003, p. 84). Auditor’s independence was further enhanced by the issuance of Sardines-Solely Act of 2002.
The Sardines-Solely Act (SOX) was established in order to get investors to increase their “confidence by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes” (Graining & Koran’s, 2008, p. 247). SOX was looking to further mitigate the possibility of auditors getting swayed to alter their opinion. The act additionally sought to force audit firms to rotate partners on each engagement as well as outlining what services they could not provide in a non-audit facet to their clients (Graining & Koran’s, 2008, p. 48). In the article by Graining, the author includes the current SEC independence as outlined by the SEC. The article outlines specific relationships between an auditor and the client should not: “create a mutual or conflicting interest between the accountant and the audit client; place the accountant in the position of auditing his or her own work; result in the accountant acting as management or an employee of the audit client; or place the accountant in the position of being an advocate for the audit client” (Graining & Koran’s, 2008, p. 48). However, these standards do not seem to be upheld in the manner that they need to be. Due to this relationships an ultimately lead to auditors and their clients the ability to commit fraud like that of the company Enron, which the SEC is looking to mitigate with such auditing standards like independence. With regard to the Enron, it was a widely publicized accounting scandal that included the company Enron and their auditors, Arthur Andersen. Per the article by Cataract, Enron failed to report various assets and liabilities.
These included ‘the nondisclosure or related party transactions, corporate governance problems, and the overstatement of assets and CEQ duty” (Cataract & Kite, 2012, p. 1 8). Additionally, the company’s audit firm, Arthur Andersen, did not hold up their responsibilities as an auditing firm. Per Cataract’s article, the auditing firm failed to test the company’s financial statements in accordance to the high level of audit risk of the company (Cataract & Kite, 201 2, p. 22).
This failure led to the SEC ruling that Arthur Andersen issued a deficient audit report for Enron and three audit partners at the firm were suspended from SEC practice until they became eligible to file an appeal for reinstatement (Cataract & Kite, 2012, p. 22). The insight that can be derived room this situation could be that the relationship between Arthur Andersen and Enron was too close, which eliminated the independence that should have been there. Since the independence was no longer present, Arthur Andersen did not test the financial as much as they should have in this instance.
Such instances like the Enron and Arthur Andersen accounting scandal have led to continued skepticism of the independence within the accounting field even after the issuance of the Sardines-Solely Act of 2002. Changing the Firm: The Proposal According to Camellia Nexus’s article the first step in completing a transition f an organization speaking with your employees and respecting their feelings and seeing them as an individual (UNESCO & opposes, 201 2, p. 379). This will eliminate the feeling that they are simply valued as an employee and not as an actual person.
Getting your employees on your side from the beginning is a huge step in successfully transitioning your company. At Arthur Bell, this would include in have a staff meeting and the managing partner of the firm to address the firm as a whole. He will need to sincerely let them know how much each and every one of his employees is valued and is not easily replaced. The next step in the transition process is to raise the awareness of your employees (UNESCO & Opposes, 2012, p. 381). The managing partner needs to fully disclose what the change that is going to happen and why this change is necessary for the growth of the company.
The more the employees know what the overall goal of the change is the more they will understand it and the more likely they are going to be willing to buy into the change. If the employees feel that they are not being told everything they could in fact cause issues for the transition of the firm making it harder to achieve the ultimate end goal. This would include and not be limited to addressing current standards issued by the PEPCO and the CPA that already outline the issue of independence. The firm would need to let their employees know why they need to make more strict policies.
In this instance it would be telling their employees that in order to obtain a more professional level of independence they will need to implement the new rule of rotating engagement partners every three years. Thus, ensuring that the firm continues to have an unquestioned independence from the engagements hat they are completing for their clients. The last step in completing the transition of the firm is the actual implementation of the new policies of the firm. This process is usually the hardest aspect to complete.
It requires a firm’s employees to break away from what they have grown to know and apply to their jobs year in and year out. The transition of rotating engagement partners for the engagements completed will take getting adjusted to especially since the change would cause the point of contact for the staff level, senior level, and manager level o change and they will need to keep their communications with the new engagement partner. This will aid in the original thought and original skepticism that will go into the audit from the new engagement partner.
This would help because not all of the partners in a firm think the same Way and will bring new and different view points to different issues that may arise. Thus, this rotation will help the engagement always be given the appropriate amount of attention that is required in order to issue an unbiased and honest opinion on the financial statements that had been reviewed. Conclusion As stated by the paper thus far it is clear that independence is a key standard that needs to be upheld in the accounting field.
Independence ensures to everyone that a company’s financial statements are accurately and fairly stated. This standard mitigates the possibility that an accounting firm and their client do not conspire to attempt to purposefully MIS-portray a company’s financial to mislead the investors of a company as well as the public. Independence is done to ensure relationships are not taken passed an appropriate level and it’s the responsibility of the firms to start building appropriate measures in order to adhere to what this standard seeks to accomplish.