Effect of Independence on Audit Quality in

Financial Statements

E.S SOEGOTO1,U S RAMADHANI2

“Department of Accounting, Universitas Komputer Indonesia”

Email : ufasramadhani@mahasiswa.unikom.ac.id

Abstract: This study aims to determine how the influence of auditor independence on
audit quality in financial statements. The research method is based on descriptive method
to find out what variables are related and previous research related to the independence of
audit quality in financial statements. The results of this study are independence is very
influential on audit quality because independence is related to auditor ethics, so in the
audit it is very independence is required and will produce financial reports that are
relevant, accurate, complete, and presented fairly. and if there is no independence in the
audit according to the research conducted it will have an impact on the results of poor
audit quality. audits carried out are quality or not.

Keywords: independence, audit, financial statements

1. INTRODUCTION
According to Arens, et all (2006), independence in auditing is taking an unusual perspective. the
Code of Ethics for Public Accountants states that independence is the attitude expected of a
public accountant so that he does not have a personal interest in carrying out his work, which is
contrary to the principles of integrity and objectivity. according to Arens, et all, (2006) The
auditor must not only be independent in fact, but the auditor must also be independent in
appearance.

Independence in fact is when the auditor can actually maintain an unusual attitude throughout the
audit. Independence in appearance is the result of other interpretations of independence.
According to Arens and Loebbecke, (2003), auditing is a process of collecting and evaluating
information evidence can be measured in an economic entity that can make competent and
independent in order to determine and report
information in accordance with established criteria. Independence is an attitude that must exist in
an auditor. If the auditor is not independent of his client, the auditor's opinion will not provide
any additional (Mautz and Sharaf, 1993). The importance of independence is in the generally
accepted Auditing Standards. Auditing Standards are general guidelines that can help auditors
fulfill their professional responsibilities in auditing financial statements. This standard includes
consideration of professional quality such as competence and independence, reporting
requirements, and evidence (Arens, et al, 2006). The financial statements will have integrity if
the audit is carried out by a qualified auditor with independence in the auditor, the decision
maker can trust the financial statements presented.

Much research has been carried out on independence, including by Pany and Reckers (1980) that
auditor independence is influenced by client size and gift giving. Then Lavin (1976) in his
research explained more deeply the concept of independence in terms of the relationship between
clients and auditors through third-party observation. Nopmanee Tepalagul & Ling Lin (2015)
Another view is that along with the lengthening of the auditor's tenure, auditors will increase
their understanding of their client's business and develop their expertise during the audit to
produce higher audit quality.

In Kharismatuti's research (2012) shows that competence and independence affect audit quality.
Then the results of research conducted by Restiyani (2014) state partially the experience has a
significant effect on audit quality. The number of researches on independence shows that the
independence factor is an important factor for the auditor to run his profession.

This study aims to (1) examine the effect of independence on audit quality in financial
statements (2) test the independent variables on audit quality. The research method is based on
descriptive method to find out what variables are related and previous research related to the
independence of audit quality in the financial statements.

2. METHOD
The research method is based on descriptive method which aims to find out what variable
variables are related in independence to audit quality and also based on previous studies related
to the independence of audit quality in financial statements.
3. RESULT AND DISCUSSION
The auditor's profession is a work based on complex knowledge and can only be done by
individuals with certain educational abilities and backgrounds. One of the duties of an auditor is
to provide information that can be useful for the public in making economic decisions. Means
that an auditor must be attributable, that is, the work indicator must be useful for decision
making. The public accountant profession is responsible for providing an assessment of the
fairness of the company's financial statements, so that society in general, and business people in
particular, obtain reliable financial information as a basis for deciding on the allocation economic
resources.

An accountant is also responsible for financial manipulations, (Carolita and Rahardjo, 2012).
Becoming an auditor must fulfill the classification determined in order to meet auditing
standards in order to meet auditing standards that can help auditors fulfill their professional
responsibilities in auditing financial statements in order to produce good audit quality. According
to Watkins et al (2004), audit quality is the possibility that the auditor will find and report
material misstatements in the client's financial statements. Based on the Public Accountant
Professional Standards (SPAP) audits carried out by auditors are said to be of good quality, if
they meet the requirements or auditing standards. Auditing standards themselves include
consideration of professional quality such as competence and independence, reporting
requirements, and evidence (Arens, et al, 2006).

in this study the author will discuss one of these standards namely independence. independence
is an attitude that must exist in the auditor. According to Mautz and Sharaf, (1993). If the auditor
is not independent of his client, then his opinion will not give any additions. According to the
author, independence is something that is in the auditor who cannot be influenced and pressured
in decision making and can provide added value to the financial statements presented by
management. listed in the prevailing Auditing Standards. Auditing Standards are general
guidelines to help auditors fulfill their professional responsibilities in auditing financial
statements. In the implementation, not all auditors have independence. There are several factors
an auditor cannot be independent when during the audit period and during the period of his
professional assignment, KAP and KAP (Bapepam, 2003) as follows:

1. Having financial interests both directly and indirectly material to the client.

2. Having a working relationship with the client.

3. Having a business relationship both directly and indirectly that is material with the
client, key client employees or client shareholders.

4. Provide certain non-audit services to clients.

5. Providing services or products to clients on a fee-based basis or commission.

Meanwhile, research conducted by Pany and Reckers (1980) found that auditor independence is
influenced by client size and gift giving. "Prizes even though the amount has little effect on
auditor independence, while the size of the client has no significant effect."

The results of Pany and Reckers' research are in line with the Indonesian Public Accountants
Institute's Code of Ethics (IAPI) Section 260.1 which states that:

"Practitioners and immediate family members or members of their immediate family may be
offered a gift or other form of hospitality (hospitality) by the client. Acceptance of these gifts can
pose a threat to compliance with the basic principles of professional ethics, for example, the
threat of personal interest in objectivity can occur when a gift from a client is received, or the
threat of intimidation of objectivity can occur in connection with the possibility of publication of
the acceptance of the prize.

Then Lavin (1976) in his research explained more deeply about the concept of independence in
terms of the relationship between clients and auditors through third-party observation. Lavin
examined three factors that influence the independence of public accountants:

(1) Financial ties and business relationships with clients,

(2) The length of the relationship between a public accountant and a client.

(3) Providing services other than audit services to clients,

While Shockley (1981) conducted a study of the four factors that influence the independence of
public accountants where the research respondents were KAP, banks and financial analysts. The
factors studied are:

(1) Providing consulting services to clients,

(2) Competition between KAP,

(3) The length of the audit relationship with the client.

(4) Size of KAP

The results of this study indicate that KAP that provides management consulting services to
clients that are audited can increase the risk of greater damage to independence than those who
do not provide these services. The level of competition between CAPs also can

increase the risk of damage to the independence of public accountants. Smaller KAPs have a
greater risk of losing independence than larger KAPs. Meanwhile, the factors of bonding with
certain clients do not significantly affect

independence of public accountants.

 Supriyono (1988) in Wati and Subroto (2003) has conducted research on auditor independence
in Indonesia. This study examines the factors that influence auditor independence, namely:

(1) Bonding financial decisions and business relationships with clients,

(2) Length of audit assignment

(3) The amount of the audit fee

(4) Giving Ajsa other than audit services,

(5) Competition between CAPs,

(6) Large accountant offices, and

Respondents selected included financial directors of companies that had gone public, KAP
partners, bank and non-bank financial institution credit officers, and Bapepam.

Deis and Giroux (1992) state that in power conflicts, clients can pressure auditors to fight
professional standards and in a large measure, a client's healthy financial condition can be used
as a tool to pressure auditors by changing auditors. This can make auditors unable to withstand
the pressure of the client, causing their independence to weaken.

Meanwhile, according to the Code of Ethics for Professional Accountants determined by the
International Federation of Accountans (IFAC) there are five types of potential threats that can
damage auditor independence, namely:

1. Self-interest threats, which occur when the auditor receives benefits from the client's
financial involvement.

2. Self-review threats, which occur when the auditor implements assignment of

confidence services involving decisions made for the benefit of the client or carrying out
other services that lead to products or considerations that affect information that is the
subject of the assignment in providing confidence services.

3. Advocary threats, which occur when the auditor promotes or is considered to promote
client opinion to the point where people believe objectivity is increasingly disrupted.

4. Familiarity threats, which occur if the auditor has a continuous close relationship with
the client, including personal relationships that can result in excessive intimidation by or
familiarity with the client.

5. Intimidation threats, which occur if the auditor is not objective and does not apply
professional skepticism because of the threat of substitution.
According to Mulyadi (2008) the following conditions often interfere with the auditor's
independent mental attitude:

a) As a person conducting an independent audit, the auditor is paid by his client for his
services.

b) As a service seller, auditors often have a tendency to satisfy their clients' desires.

c) Maintaining an independent mental attitude can often lead to client loss.

4. CONCLUSION
The conclusion of this study according to the researcher is that an accountant is required to have
the character of independence, this character is very important for the public accounting
profession in carrying out examinations or auditing clients. Trust given by clients to public
accountants in carrying out checks

and users of financial statements in order to prove the fairness of the financial statements that
have been prepared and presented by the client. Independence is one aspect that is very important
for an accountant's professionalism in forming high personal integrity. An auditor must be able
to gather information needed in decision making supported by an independent attitude.
Independence is the dominant variable influencing audit quality

5. ACKOWLEDGEMENT

This paper aims to fulfill the final assignment of Entrepreneurship courses in the faculties of
Economics and Business Accounting Study Program, Indonesian Computer University. As a
result this paper cannot be separated from the assistance and guidance from the parties who assist
in completing this paper. The authors would like to thank God Almighty Esa, to parents who
always guide and support the work of this paper and friends who always accompany and give
encouragement to the author and for all who are involved and assist in this research so that they
can be resolved properly. And thank the readers who have agreed and accepted the paper This
writer also appreciates previous research research so that it can provide information and
inspiration that can help and complement this research.
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