Examining Audit Relations: A Reconsideration of Auditor Independence

Abstract

Auditor independence is a construct that has been, and continues to be, connected to the credibility of financial statements and the effective functioning of capital markets. Given the important role assigned to independence by various regulators including the Securities and Exchange Commission (SEC), its appearance as a recurring issue of concern and debate is unsurprising. Concerns about auditor independence in the context of various accounting scandals, such as Enron and WorldCom, contributed to the enactment of changes in the institutional arrangements for regulating auditors and renewed efforts to enhance auditor independence. Rather than continuing with perhaps futile efforts to achieve independence, I argue that we need to re-evaluate the utility of this concept as a guide to regulating audit practices. Independence, with its connotations of an unachievable autonomy and linkage of professionalism to an unobservable mind-state, may hinder, rather than aid, the audit purpose for SEC registrants – the mitigation of aggressive financial reporting. Independence as autonomy is impossible within an environment in which management pays for the audit, hires and fires the auditor, and is the primary contact for auditors. Rather than searching for ways to make the auditor “more” independent, I discuss changing the focus of regulatory attention to an open examination of and emphasis upon the relationality of auditing practice. This change in perspective requires us to examine the various relationships in which auditors are embedded and to assess whether these are more or less likely to encourage the auditor/audit firm to fulfill the purpose of an audit. I specifically explore three categories of relationships – relationships with the auditee, relationships with the audit committee and relationships with the audit firm. I also examine how this focus on relationships may contribute to our thinking about policy decisions relevant within the current audit environment, including assessing the likely impacts of consulting and personal relationships with auditees, ways to put a “face” on the public and assessing the compensation and marketing practices of accounting firms.

Citation

Young, J.J. (2006), "Examining Audit Relations: A Reconsideration of Auditor Independence", Lehman, C.R. (Ed.) Independent Accounts (Advances in Public Interest Accounting, Vol. 12), Emerald Group Publishing Limited, Leeds, pp. 49-65. https://doi.org/10.1016/S1041-7060(06)12004-0