Analysis of the factors influencing the auditing independence

Abstract. Whether the CPA industry can maintain the appropriate independence is related not only to the industry itself， but also to the big development environment of the entire national economy. In this paper， based on the existing research results， starting from the definition and evolution of independence， giving full consideration to the factors affecting the independence， and combined with the status quo in China， the suggestions and measures are proposed to maintain the independence of the audit.

Key words： Independence； audit； countermeasure； factors

1. Meaning and developing of the auditing independence

Thomas. G. Higgins， president of the occupation ethics committee of the association of Chartered Certified Accountants in the United States， further improved and generalized the concept of independence in 1962. He thinks， "The CPA must have the independence， which in fact has two types， the independence of the essence and the independence in the form". The so-called formal independence means that the certified public accountant must have no special interests with the enterprises or the individuals. For example， they must not own the stock rights of the reviewed enterprise's corporate equity or take senior positions， and they cannot be the main lender of the enterprises， the asset trustee nor have kinship with the authorities， etc. Otherwise， it will affect the CPA impartially executing businesses. The so-called independence in substance is also known as the independence of the spirit， which holds that the independence is a state of mind， a kind of self-confidence and does not rely on and succumb to the pressure and influence from the outside world in the judgment. It requires the registered accountants to maintain strict aloofness in the process of practice， not subjective to nor favor any party. In particular， they should not attach or succumb the conclusions of his own to the effect and pressure of the interest group or the person who hold the oppose opinions. From the above result， the independence in substance is intangible， which is often difficult to observe and measure. But the formal independence is tangible and can be observed. The public usually speculate the independence in substance through the formal independence of CPAs.

The CPA examination guidance material "The audit" compiled by the Chinese Institute of Certified Public Accountants in 2005 gives the definition of the independence： "The independence refers to the substantial independence and formal independence. The substantial independence means that when the certified public accountant expresses the views， his professional judgment is not affected， and he does justice practice， and maintains objectiveness and professional skepticism. The formal independence means that the accounting firm or the verification teams avoid such major case that the rational third party who has full information infers its impartiality， objectivity or the professional skepticism is damaged.

2. The status quo of China's audit market

Since 1999， China has carried out the reform of CPA firms. All CPA firms are completely decoupled with the government agencies， and become the enterprise management organizations of independent practice， self financing and self development. Without the government as the backing， and no administrative intervention which is not necessary， the national audit personnel completely separate from the independent audit. The independent audit goes into the free market competition， and the firms essentially become the independent professional organizations worthy of the name. At the same time the unqualified and non-standard firms are cleaned up， and the folk audit gropes towards legalized and standardized track.

But since then， the legal litigation cases of the independent audit increased sharply， and the independent audit occupation almost came into the litigation explosion. Although the number of Chinese firms is big， they are consistent with the small， scattered， chaotic state， and most do not have the capacity to independently undertake larger and super large enterprise auditing. With China's entry into the WTO and the integration of the world economy， the audit field opening to the outside world of our country has increased， allowing foreign audit organizations to enter the Chinese market as foreign investors. But the CPA fraud was exposed one after another as buried mines. First is the Qiong Minyuan. The fictitious profit 0.54 billion Yuan， and increase the capital accumulation fund 0.657 billion Yuan， which causes the share prices to rise 4 times in 5 months. And then is the Yin Guangsha fraud. Yin Guangsha in 1999 and 2000 cooked up fictitious profit 0.74 billion Yuan， and made up "the first big blue chip stocks" mythology of the Chinese stock market. These have resulted in strong stock market shocks and a lot of people are fooled and even crowning calamity， and further caused long-term stock market downturn， and the national economy has been severely tested.

3. The influencing factors of audit independence

3-1. The idea that the administrative power is supreme

Our country has experienced thousands of years of feudal autocratic rule， and the emperors had supreme privileges， and the magistrates also centralized powers on major issues， but the subordinate officials and people only had the right of obeying. The idea that the administrative power is supreme rooted in the minds of the people. Although after the liberation of China we established the system of people's congress， in the management of economic and social affairs of our country， we are accustomed to the use of administrative powers， especially there are many cases of ultra vires powers of some government officials or units， which have a negative influence on the audit work. I think it is the behavior of the government that resulted in the failure of the internal management of many state-owned enterprises. Like the above case， the Yongfa factory did not improve the un-reasonable governance mechanism of itself， but with the name of state-owned enterprises relied on the government， and thought that under pressure from the government， the accounting firm audit in the new era was a mere formality as before， and there would be no problems， and didn’t expect all the facts of the firm would be exposed.

3-2. The audit market

China is trying to take the CPA business fully to the market just like developed countries， but at present our country has not yet formed a sound audit market. As far as the demand of the audit market， although China's current financing program， IPO and pricing mode have its historical inevitability and rationality， it also results in the lack of high quality audit services of the market. At present， in the accountant market of our country there are a number of accounting firms of small scale， weak technical force， and their quality control and self-discipline mechanism are not perfect. These small and medium-sized firms tend to adopt the lower audit fees to customers or improper intention means to share "a cup of soup" of the audit service market， and there emerges a state of disorder of the market competition.

3-3. The principal-agent relationship

Independent audit is the review activities where the CPA accepts the commission of the property owners and to review the situation of implementation of accountability of the property operators. There is a special relationship between the client， the auditee and the audit. But， at present， our corporate governance structure of the company is not perfect， and the property right of many enterprises is not clear. The separation of the shares of the company with the right of ownership and management makes the substantive audit principal shareholder difficult to exercise their right of supervision on the company. In the current auditing relation pattern and the CPA occupation supervision and sanctions regime， when the CPA bears the risk of dismissal exposing the fraud of the customers， he is likely to succumb to the listing Corporation， and issue false audit reports from it， and even cheat with it.

3-4. The CPA itself

Once the comprehensive ability of the auditing staff is not strong， or lacks the professional experience， then in the entire audit process， naturally he needs guidance and assistance of the audit staff， thus has difficulty forming the independent audit opinions， which will affect the independence of the audit work. In addition， some practitioners have no comprehensive understanding about their work， and do not have a strong sense of responsibility and moral consciousness， and now the general social credibility is reduced， so the independence of audit is bound to be affected in the current social context. In the face of the temptation of economic interests， they give up occupation ethics， submit the audit opinions to the audit requirements， issue false audit reports， forfeit the function to express the audit opinions， or disclose the confidential business information contacted in the audit process， which seriously damage the auditing independence.

4. Measures to improve the audit independence

4-1. Improve the social environment

4-1-1. Effectively standardize the government demand for legal services

We should deepen the reform of the enterprise， establish the modern enterprise system that "the property rights are clear， powers and responsibilities are clear， government functions separate from enterprise management， and the management is scientific"， improve the operation and management of state-owned assets， establish operation and management company of state-owned assets， and solve this kind of problems of state-owned enterprises "vacancy of owners"， in order to reduce the administrative intervention on the government audit to state-owned enterprises， which can fundamentally make the managers of the plant to focus on its business performance， and then focus attention and related information the CPA service provides， so as to provide advice and help for the improvement of the enterprise management and the economic efficiency and the change of the mode of economic growth. For the government， they should transform government functions， to avoid multiple checks and repeated supervision of enterprises. After the determination of the content and the scope of the annual audit of state owned enterprises and the firms， in general， the finance and price departments will no longer go and check the enterprises which have been audited. In this way， we can lighten the burden of the enterprise， and also increase the demand for social audit of state owned enterprises. At the same time， we can improve the annual report format， increase consideration files supporting the special audit of the state-owned enterprises.

4-1-2. Accelerate the construction of market economy

The requirements of the market economy are the rational allocation of resources and efficiency， so the market acceptance is the successful enterprises with strength and good management， and the enterprises relying on the relationship to have access to the survival and development of space will become increasingly smaller. So we must speed up the construction of the socialist market economy and establish the concept of the market economy， to create a good environment for the audit. The establishment and perfection of the social credit system is not only the inevitable result of the development of market economy， but also is the necessary condition and basic characteristics to establish and perfect the market economy system. The same is true for the accounting firms as the intermediary service institutions. The state should crack down on illegal firms and illegal activities of firms， to establish perfect laws and regulations， and standardize the firm behaviors. The honesty construction of certified public accountants should gradually establish the credit supervision system of the practice institutions and practitioners， and perfect the punishment and elimination mechanism of discreditable behaviors， and increase credit costs of false irregularities.

4-2. Standardize the audit market

At present， we should reform government’s supervision and management pattern for the listing corporations， and cancel all forms of administrative examination and approval procedures. Whether the enterprise can appear on the market and the price of the IPO is completely based on the market demand. The demand of the listing corporation for audit services do not take the policy needs as the first orientation， but the market self as the first guide， and gradually change the situation that our securities accounting market take everything from the government. At the same time， the government， the audit committees and other relevant aspects can also create a fair and reasonable market environment through the promulgation of regulations or some standards. If the CPA firms and CPAs are to abide by the rules， and do not disorderly compete in the "contest"， to a certain extent， it is enough to curb the behavior of listing Corporations changing any CPA firm.

4-3. Balance of auditing relationship

Our country should reform the client system， and stipulate that the audit clients are the general meeting of the shareholders. The directors and the managers are not allowed to replace the principals. We should also deepen the reform of the management system of state-owned enterprises， to find a reasonable and true person in charge of the state-owned enterprises and the property representative to take the risks， to strengthen the constraints of the owner on the operators. But in view of the current situation that the audit commission of our country’s listing corporations is not clear， and the shareholders lack the effective restriction mechanism on the status management of the General Assembly， we must introduce the independent director system. The independence of independent directors plays an important role in the governance structure， and also plays a special role in the areas of management， balancing the rights of the company shareholders and managers， and the protection of the rights of shareholders etc.

4-4. Strengthen the legal construction of auditing

As the premise and guarantee of the social "order"， the set， innovation and institutional change of the regulations have a dominant effect on all members of society and the individuals， to regulate their behavior patterns， and affect their values. An important standard to measure the development level of a country’s CPA industry is whether there is a set of suitable and applicable independent auditing rules and regulations. From the Southeast Asian financial crisis， a country must have a higher performing auditing standard without appendage and backward auditing practice.

4-5. Improve the quality of internal audit staff， and strengthen the construction of the internal audit teams.

The first is to establish the internal audit personnel occupation ethics， strengthen occupation moral education and the study of the policies and regulations of the internal audit staff， and improve their moral cultivation and policy levels. The second is to strengthen the continuous education of internal audit staff. In addition to the financial accounting and auditing knowledge， they should also be familiar with the related knowledge of laws， economy， finance， trade， taxation， statistics， infrastructure， enterprise management and computer， and constantly update their knowledge structures， and enhance the service ability. The third is the regular rotation of internal auditor objectivity， to avoid damage caused by long-term audit in the same units. In addition， we also can borrow the external audit and CPA evaluation of internal audit to assess the work performance of the internal audit staff.

5. Conclusion

As the guard of the public trust， the accounting profession is steadily developing， and following the economic market of the era of globalization information technology. Audit， this is a private occupation of public compulsory， and is a very hard occupation but is often a thankless task. What is out of the ordinary is that the auditing profession is privileged， very important and also very fragile. Every day， they have been required to tirelessly survey and judgment sharply. A miss is as good as a mile. They always bear the unique pressure， and are faced with severe challenges. Today， the accounting industry is facing both the opportunities and risks of the independent auditor change， and the accounting industry life. Regardless of how the world transforms， the auditors must not sacrifice the independence principle and promise that the basic principles will never compromise.

6.Acknowledgements

Project： Research on internal control and audit—the incidence relation based on the financial report audit and the internal control audit

References

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