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Volume :12 Issue : 47 1986      Add To Cart                                                                    Download

THE APPEARANCE OF EXTERNAL AUDITOR’S INDEPENDENCE IN JOINT STOCK COMPANIES A COMPARATIVE STUDY

Auther : By: Dr. Ibrahim O. Shahin

          Auditors’ independence is one of the most important aspects of auditing to the extent that it has been viewed as “the raison d’etre” of auditing.  In joint stock companies, external auditors’ independence is vital because of the divorce between management and ownership.  Under this form of company the owners (shareholders) delegate the management to a board of directors which prepares financial statements indicating the company’s results of operations and financial position.  The external auditor audits this accounting information and expresses his opinion thereon to the shareholders.  The shareholders, as well as other interested parties rely on the external auditor’s opinion and his independence is therefore of great importance to them.

           Independence means the objectivity and integrity of the auditor in the performance of his function.  It has been basically viewed as an attitude or a “state of mind”.  However, observing and measuring attitudes and states of mind are rather difficult particularly to distant parties.  Accordingly, several rules and regulations organizing independence have been developed to convince the observer that independence exists if they are met.  The later aspect is referred to as “the appearance of independence”.  It has been the focus of much legislation and many professional recommendations for the long term.

          This research has attempted to achieve the following objectives:

 1.                 The delineation of the various laws, regulation and professional recommendations regarding the appearance of external auditors’ independence in joint stock companies in four countries: The United Kingdom, Egypt, Kuwait and India.

 2.                 The classification and comparative analysis of the rules outlined in (1) above.

 3.                 Revealing the behavioral hypotheses upon with these rule are based.

 4.                 Analyzing the behavioral hypotheses to find out whether they are rational and consistent.

 The results of the research indicate that there is a good deal of conformity between the rules governing the appearance of independence in the four countries.  However, the research has also revealed a behavioral inconsistency in these rules between two different views of the external auditor: (i) As representative of the owners (shareholders) and (ii) as representative of society.

 The writer believes that adopting the two views simultaneously could result in confusing the external auditor and could also lead to dysfunctional work behaviour.  Thus a clearer and more accurate view is required which could clarify matters to the auditor and to the users of his auditing information.

 

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