Pcaob Requirements On Independence For Auditors Research Paper

Type of paper: Research Paper

Topic: Audit, Independence, Finance, Client, Law, Board, Organization, Profession

Pages: 3

Words: 825

Published: 2021/02/13


Auditing pertains to the examination and unbiased evaluation of financial statements of an organization by an auditor. An auditor is, therefore, the professional who audits the financial statements. The importance of an auditor’s independence cannot be over emphasized considering the relevance of the financial statements to all the stakeholders in an organization. It is in realization of this relevance that the Congress established Public Company Accounting Oversight Board as a nonprofit organization. PCAOB’s mandate is to oversee auditing of public companies with the sole intention of safeguarding the interests of all stakeholders encompassing investors and the general public (AICPA, 2015). It ensures that the entities prepare accurate, informative and independent audit reports (The Economist, 2014). In order for these reports to be accurate and impartial, it is paramount that the auditors preparing them are independent and can do their professional work without any form of biases. PCAOB, therefore, prepared rules that would ensure the independence of auditors. The rules have played an important role in ensuring that all stakeholders’ interests are safeguarded (Cohn, 2015). They should, therefore, continue to be used, and improvements made where necessary.

PCAOB Requirements

The rules by PCAOB require that when an auditor is attesting his or her engagement, they should consult their local professional regulatory bodies. The reason is to familiarize themselves with their independence requirements just in case they may be different or stricter than those of American Institute of Certified Public Accountants (AICPA, 2015). The board considers independence to have been breached or impaired in a number of circumstances. Firstly, it will be considered impaired if the auditor has direct or indirect financial interest in the client during the time in which he was professionally engaged with the client. It is apprehensible that when an auditor has a financial interest in the client, it could be difficult for him to be unbiased especially when his independent actions might affect him financially. Secondly, independence of the auditor will be impaired if any of his or her family member, professional employee or business associate, are owners of more than 5% of the client’s equity during his period of professional engagement (Wyatt, 2015). This requirement, just like the others is meant to ensure that the auditor does not have a conflict of interest when performing his professional duties. The presence of conflicts of interest on the part of the auditor is likely to make him/her overlook issues in the client’s financial statements that would negatively affect his interests if highlighted by his audit report. The third PCAOB requirement prohibits an auditor from engaging with a business in which; during the period of the financial statements to be audited, or period of engagement, an employee of the auditor, or professional associate had simultaneous association with the client. The association has to be in a management position, as a promoter, trustee or in a position that has significant influence the on the client company’s management decisions (AICPA, 2015).

Role of Auditors to Independence

Auditors have an ethical responsibility to ensure that they conform to the rules and regulations that have been put in place by accounting bodies to ensure that they remain independent in their duties. They have the responsibility to protect the shareholders by ensuring that their reports are accurate and represent the actual state of the business organization (WSJ, 2002). They also have a role to help in preparing rules and regulation that will regulate their performance in the best possible way. There is complains that some of the guidelines that have been put in place by bodies such as Auditing Standards Board are impractical. Such guidelines make it difficult for auditors to work with honesty. The current auditing requirements are adequate to serve the interests of all the parties involved and should, therefore, continue to be used. As time changes, however, some of the requirements become a hindrance to the effective performance of auditors (Doty, 2015). There is a need, therefore, for frequent revision of the rules to conform to the prevailing circumstances.

Impact of Eliminating the Requirements to Users

The requirements laid down by PCAOB are so important to stakeholders that eliminating them would have a significant negative effect. For instance, if the requirements are scrapped, an auditing firm will be allowed to audit a partner or associate organization. If the auditor as a partner or associate took part in a fraudulent activity, he is unlikely to disclose it in his auditing report. In the end, it is the organization’s stakeholders that will suffer. The auditor and the management can conspire to embezzle money from the organization. Public corporations will be the most affected considering that even now with the requirements, there are still irregularities reported (WSJ, 2002). Government revenues will also be reduced since firms will be conspiring with auditors to report, profits so that they can avoid high tax bills.


Regulation of auditing practice is of paramount importance. Most public companies prepare financial statements that show strained financial results. The objective of such statements is to conceal fraudulent activities by the management. Auditors are then pressurized to sign off such statements (WSJ, 2002). Such pressures are not good for auditing profession since the make auditors to lose their objectivity while auditing. Oversight bodies such as PCAOB should, therefore, intensify their oversight activities to ensure that auditors do not succumb to such pressures.


AICPA,. (2015). ET Section 101 - Independence. Pcaobus.org. Retrieved 11 April 2015, from http://pcaobus.org/Standards/EI/Pages/ET101.aspx
Cohn, (2015). Ethics Board Aims to Strengthen Auditor Independence during Long Client Associations. Accounting Today News. Retrieved 11 April 2015, from http://www.accountingtoday.com/news/auditing/ethics-board-strengthen-auditor-independence-long-client-associations-71686-1.html
Doty, a. (2015). Sarbanes-Oxley and the Importance of Independent Audit Oversight - NYTimes.com. Nytimes.com. Retrieved 11 April 2015, from http://www.nytimes.com/roomfordebate/2012/07/24/has-sarbanes-oxley-failed/sarbanes-oxley-and-the-importance-of-independent-audit-oversight
The Economist, (2014). The dozy watchdogs. Retrieved 11 April 2015, from http://www.economist.com/news/briefing/21635978-some-13-years-after-enron-auditors-still-cant-stop-managers-cooking-books-time-some
WSJ, (2002). Auditor Independence: The SEC Chairman Doesn't Get It. Retrieved 11 April 2015, from http://www.wsj.com/articles/SB1011754049971567480
Wyatt, E. (2015). Accounting Board Seeks to Rotate Auditors. Nytimes.com. Retrieved 11 April 2015, from http://www.nytimes.com/2011/08/17/business/accounting-board-considers-measure-to-rotate-auditors.html?_r=0

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