Question

The SEC has been concerned with the “independence” of external auditing firms. It is especially con-cerned about how large non-audit (such as consulting) fees might impact how aggressively auditing firms pursue accounting issues they uncover in their audits. Congress passed legislation that prohibits accounting firms from providing both consulting and auditing services to the same client. How might consulting fees affect auditor independence? What other conflicts of interest might exist for auditors? How do these conflicts impact the governance process? I need the answer for last question.

Answer 1

Corporate governance is the organization system through which organisations are directed and controlled. It covers the relationship between the board of directors, shareholders, auditors and other stakeholders and the effects on corporate strategy and performance. Corporate governance plays an important role as it defines how decision makers act, how they can or should be monitored, and how they can be held to account for their decisions and actions. External auditor help ensure that decision makerts indeed ensuring that organization is being governed basis highest possible integrity. A potential conflict of interest arises when external auditors take up multiple assignment with the firm resulting in impact on oversight provided and opinion expressed by the external auditors.

Confict of interest can result in impairment to auditor independence due to the impact of behavioural and cognitive factors on auditor judgement and auditor independence, and effects of such factors on the ability of auditors to conduct audit with the required degree of scepticism.