Contemporary issues in accounting and finance Essay

Contemporary issues in accounting and finance - Essay Example A recent FEE (Federation of European Accountants) publication states that â€Å"an individual’s objectivity must be beyond question when conducting and reporting on a statutory audit† (FEE). This paper will critically evaluate this statement with particular reference given to some fundamental financial/accounting/auditing concepts and external studies. Objectivity of statutory auditors There are many situations where a statutory auditor’s objectivity would be questioned when auditing financial statements of a firm. To illustrate, an auditor faces this challenge while dealing with the valuation of assets. In order to understand this situation clearly, it is necessary to discuss the difference between fair value and historical cost. Under historical cost accounting, assets and liabilities are valued at original acquisition price and any increase or decrease in their market value over the years is not taken into account (Shome 1995, p.135). In contrast, assets and l iabilities are valued at the market price in the current date under the fair value accounting method (Wood 2009, p.344). Traditionally, books of accounts were kept at historical costs. However, fair value accounting replaced this conventional accounting practice nearly two decades ago and since then the assets and liabilities are measured at their current value estimates (Ramanna 2013). Today, most of the firms value assets and liabilities at the estimates of their current market value in order to give the stakeholders a detailed view of the financial status of the business. Since dubious assets/liabilities valuation practices have led to many corporate failures over the last decade, it is a challengeable task for auditors to certify the reliability of fair value accounting. Under such circumstances, a statutory auditor’s objectivity is likely to be questioned if he has any specific interest in the firm. Fair value accounting represents the social construction of reality wher eby legitimacy, power, and illusions are created. As experts point out, new epistemic criteria have to be created to address the socially constructed reality of fair value accounting. Fair value accounting clearly represents socially constructed reality, and auditors are expected to maintain professional ethics and legitimate practices (Jeppesen & Liempd 2011). In order to verify this socially constructed reality, auditor’s independence has to be specifically promoted. The auditor’s independence can significantly affect the credibility of financial statements (Olagunju 2011). Hence, there is a positive relationship between independence of an auditor and credibility of the financial statement (Ibid). In addition, an auditor’s independence can justify his objectivity to a great extent. The auditor’s independence has two distinct aspects including real independence and perceived independence (Sucher & MacLullich n.d.). Accomplishment of both these aspects is essential to achieve the ultimate goals of auditor’s independence. Real independence can be simply defined as the independence of the auditor or independence of the mind (Palmrose & Saul 2001). More precisely, real independence is related to the state of mind the auditor maintains and how he manages a particular situation. A really independent auditor would make independent decisions even though he is forced to handle a compromising condition by the company’