Audit Independence Case Study Example | Topics and Well Written Essays - 1500 words

Audit Independence - Case Study Example This paper provides an insightful study into the role played by lack of competition in the audit marketplace in affecting auditor independence and the ways through which it can affect the audit quality. It also sheds light on the solutions actually implemented to resolve this problem as well the ones that have been proposed and yet to be implemented. Lack of competition in the audit marketplace is one of the most significant concerns among the regulators these days. Lack of competition in the audit marketplace refers to the fact that there are big four auditing firms predominantly involved in the provision of accounting services around the world encompassing approximately 78% of the total US publicly trading companies. There is a serious lack of accounting services firms in several markets and usually companies are left with no or few choices as to the selection of company auditor because of domination of these big four firms in their respective markets. For example, KMPG has a dominating position in providing auditing services to financial institutions whereas PricewaterhouseCoopers is dominant in the coal and petroleum industry (Bloom and Schirm, 2005). The events such as Enron and WorldCom led to the widespread notion of audit failure or audit incapacity to act as shareholders representatives and report any problems prevailing in the company. This lack of competition became a concern of crucial importance soon after the incidence of Enron and the termination of Arthur Andersen (Bloom and Schirm, 2005). There have been several causes behind the occurrence of such events that seriously shattered the image of auditing and accountancy service profession and directed the attention of regulators towards the notion of lack of competition in the audit marketplaces. Simunic and Stein (1995) elaborate that the market for professional accountancy services highly lacks competitiveness because of several rigid restrictions imposed by the government such as code of ethics, limit on fees and prohibition of advertisement etc. Such restrictions as well as the dominance of big four firms in the industry has been hampering the advent and success of new firms in the market leading to lack of competition. Apart from that, these firms are also involved in the provision of non-audit professional services to their client companies. Because of that fact that there happen to be a very few number of firms in the market, companies turn towards these four firms for both audit and non-audit professional services. Such involvement also contributes to concentration of a major part of these audit firms' income in the client company. This has been the major factor affecting the independence of auditors in providing an opinion on a client company's financial statements. Hence, lack of competition in the audit marketplace is considered to be acting as a threat to audit independence. Audit independence refers to the notion of complete freedom on the part of an auditor while presenting an audit opinion. Hemraj elaborate that "the function of 'public watchdog' demands that the auditor subordinates