INDEPENDENT AUDIT MATTERS: MITIGATION OF AUDITORS’ INDEPENDENCE ISSUES AND BIASES

Abstract

Since the users of the financial statements cannot directly observe the true underlying fundamentals of the organizations, they have to rely on reported accounting numbers. Auditors assure the conformance of the financial reports with accounting standards and mitigate the agency problems between the managers and the users of the financial reports. Hence, auditors are known to provide external governance mechanisms as they monitor the financial numbers for potential fraud, errors, or asset misappropriation and discipline opportunistic managerial behaviors. More specifically, within an agency theory framework, auditors play a significant role in reducing the information asymmetry between the agents (i.e., managers) and the principals (i.e., shareholders, debtors, creditors, regulators, etc.). The discussions in this article has implications for various stakeholders, including shareholders, creditors, donors, and regulators, as the study suggests that auditing facilitates proper oversight and monitoring in the organizations. The article explores the potential issues related to auditor independence and biases. In addition, the article summarizes various strategies to mitigate auditors’ biases and independence issues.