Table of contents(14 chapters)
It is in the context of the huge (but largely unaccountable) impact of accounting and accountants that the demise of Arthur Andersen and the financial scandals of the past few years need to be seen. These scandals raise questions of independence and the role of the audit industry in alerting investors, employees, suppliers, customers and the general public to the realities of corporate wrongdoing and weakness. This paper introduces a Special Issue that offers a counter-hegemonic story, pointing out that things can be different and better in substantive ways, that auditor independence and integrity require more substantive thinking and analysis than simple re-arrangements of regulatory institutions or calls for superheroes who can transcend pressures to abet crime. After reviewing the contents of the various contributions to this Special Issue, the paper makes some brief comments about possible solutions to the problem of independence of audits and suggests a focus on audit, not auditor, independence.
This paper has two purposes. The first is to demonstrate that over time, and in a number of professional and academic places, the concept of auditor independence has been contested; that is, there have been different concepts of auditor independence within different time periods, and even when there appears to have been consensus on the meaning of auditor independence, there have been significant debates about auditor independence. The second purpose of the paper is to advocate a complete reconsideration of the concept of auditor independence; one which would move us towards the idea that auditors should be prohibited from acting as advocates in any way on behalf of their clients, and that client management should have no ability whatsoever to determine the audit fee or the scope of audit engagement. These are controversial ideas. They are meant to be so.
A basic principle underlying the public securities markets in many countries is that the interests of investors need to be protected. Independence from their clients (i.e., client management) is supposed to make it more likely that auditors will protect investors’ interests. This paper examines the question whether acting in accordance with professional rules governing accounting and auditing is sufficient to provide such assurance. In addition to a set of rules, it is argued that investor protection requires that auditors possess, or act with, integrity. An analysis of the principle of acting with integrity, as contained in the AICPA Code of Professional Conduct, shows that its formulation of the principle conflicts with the concept itself, and thus that the profession's commitment to integrity is questionable. Five recent and prominent cases are examined, which show that the required integrity may be lacking. The implications of a lack of integrity are discussed at the end.
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.
The debate over an auditor's ability to remain independent while simultaneously providing nonaudit services to the audit client has a long history. In recent years, several factors have combined to heighten regulators’ concerns about this issue. This study uses a case methodology research design to analyze the testimonies given by financial statement users at the Securities and Exchange Commission's (SEC, 2000b, 2000c, 2000d, 2000e) Independence Hearings in relation to this debate. The analysis is framed by the principle of user primacy. Findings indicate that changes from the SEC's initial proposal to final rule on independence are more closely aligned with preparers’ than users’ preferences, despite claims to the contrary.
The purpose of this essay is to discuss the involvement of the U.S. public accounting profession in federal politics and to focus attention on the extent to which the profession engages with federal legislators and other policymakers to influence public policy. In the essay, I discuss and present evidence regarding the profession's use of political strategies such as making political campaign contributions and lobbying federal legislators and regulators. The profession's political efforts are then examined within the context of their self-proclaimed commitment to the public interest. I conclude that the public accounting profession's extensive involvement in federal politics works principally to protect its own professional interests and favors conservative, pro-business agendas. As a result, broader public interest responsibilities are often neglected. Although the profession deserves the right to participate in public policy debates, its parochial and patronage orientation does not resonate well with its self-proclaimed professional cornerstones of independence and integrity.
This paper takes position against the spread of the free-market logic in the domain of accountancy, where free market is often viewed as undeniably benefiting society and users of financial statements. A key moment that paved the way for the growing influence of the free-market logic in accountancy resides in the elimination of institutional ethics rules prohibiting direct and uninvited solicitation of clients, which occurred in the 1970s. Importantly, it was (some would say quite naïvely) assumed that auditors would be able to maintain their independence from auditees in a surrounding climate emphasizing market competition and individualism. However, research indicates that before the collapse of Enron and Arthur Andersen, a number of auditors were significantly concerned about auditor independence being undermined in actual practice. Yet, their concerns were kept largely in the dark. It took the billion-equity collapse of Enron and the powerful imagery related to the shredding of documents by its external auditor Arthur Andersen, as well as the collapse of WorldCom a few months afterwards, to bring to light the undermining of auditor independence in the public arena and to create a momentum in favour of reforming authoritative regimes of auditor independence, therefore constraining to some extent the influence of the free-market logic in accountancy. My main argument is that these collapses could perhaps have been avoided if auditors’ dissenting and negative points of view on auditor independence had been voiced, heard, and appropriately taken into account by accounting organizations and regulatory bodies. Accordingly, it is recommended that channels be established for practising auditors to communicate concerns that emerge from their daily experiences and which cast doubt on the conceptual foundations of financial auditing. Establishing such mechanisms may help to guard against the excesses of the free-market logic; the latter definitely should not reign unchallenged.
This paper looks at changes in the manner in which the accounting profession speaks about itself. Specifically, it considers Canadian and American research that has examined how the profession's internal and external ethical discourses have emerged, survived, and declined over time. The functions that ethical discourses serve are briefly reviewed, and the changes observed in these discourses are contextualized in light of a number of social, cultural, political, and economic factors.
We suggest that a notion of auditor independence, constructed in Anglo-American epistemology and practice, is a social construct that has different meanings in different historical, socio-cultural and economic milieus. We have researched how this idea of auditor independence, incorporated locally from the International Federation of Accountants (IFAC) Code, is perceived and has been implemented in three countries of the Central and Eastern European (CEE) region: Poland, the Czech Republic and Russia. With a view to seeking a comprehensive understanding of what is happening in transition economies, all aspects of auditor independence – from basic educational provision for an auditor, to complex aspects such as the provision of non-audit services – were considered. From all these aspects of independence, a framework of the requirements for independence was developed. As a result of this research, we question whether the usual international definitions of auditor independence, as laid out in the IFAC Code, with their separation into mind and appearance, are at all realisable.
This paper reviews key aspects of the regulatory response in the UK and the USA to the apparent crisis of confidence in auditing stimulated by Enron and other recent corporate scandals. Drawing on a consideration of the nature of the market for auditing services and the regulatory and corporate governance structures in which auditing is embedded, the paper argues that the bulk of recent regulatory attention appears to have been on matters of auditor independence rather than auditor competence. Such a focus is seen to have parallels with former ‘crisis’ eras in the auditing arena, while the analysis presented also raises questions about the status of the auditing function within accounting firms and the capacity of regulatory reform to deliver a fundamentally enhanced auditing function. The paper concludes by stressing the importance of making more transparent what is being done in the name of auditing and audit regulation.