Auditor's Independence

Introduction

Auditor independence is recognised to have two distinct dimensions: independence in fact, which is an unbiased mental attitude of the auditor, and independence in appearance, which is the perception by a reasonable observer that the auditor has no relationship with an audit client which would suggest a conflict of interest (AICPA, 1993). Research has focused upon identifying the factors which potentially influence independence, and assessing their impact upon perceived independence since independence in fact is unobservable. Empirical studies date from the mid-1960s (Schulte, 1965) and typically employ a mail questionnaire approach.

Early studies, conducted before (or just after) more rigorous ethical guidelines on independence issues were put in place by many countries in the 1970s, focused on specific auditor-client relationships in the four areas of fees, personal relationships, financial involvement, and conflicts of interest. Several of these relationships, which twenty years ago were considered acceptable, have now been proscribed for many years (e.g., ownership of shares in client). Since then, studies have focused on the impact of changes in the economic and regulatory environment in which accounting and auditing takes place and in which independence perceptions are formed.

The four themes now commonly addressed are the economic dependence of the auditor on the client company, audit market competition, the provision of NAS, and the regulatory framework. Of these, economic dependence and NAS have grown in significance since the early studies, both in absolute terms (due to the changing environment) and because of the regulatory changes which have removed other concerns (i.e., specific auditor-client relationships). Competition and changes in the regulatory framework to enhance auditor independence perceptions are more recent issues. Three key themes are sufficiently general to permit broad comparative analysis across time and countries (economic dependence, competition, and NAS), while the accounting and auditing regulatory framework is unique to each country at a point in time.

Review Literature

Existing studies of auditor independence perceptions either focus exclusively on ethical rules or investigate a very limited number of key generic factors (economic dependence, competition and NAS) using a repeated measures, fixed effects research design. Such studies can provide little insight into the ability of specific regulatory changes affecting the accounting and auditing environment to enhance perceptions of auditor independence, i.e., mitigate against the common threat factors. Nor can they evaluate the relative threat posed by a range of ongoing and emerging threat factors. The research approach adopted is, therefore, to select for study a setting where there have been specific regulatory innovations relevant to auditor independence and investigate these in the overall context of a comprehensive set of factors affecting auditor independence perceptions. Within-group consensus (using a scaled response variable) is explicitly considered. Additionally, factor analysis is used to uncover the key dimensions affecting perceptions of auditor independence. The views of two main groups (preparers and auditors) and a small group of users are elicited and compared.

Existing studies of auditor independence perceptions either focus exclusively on ethical rules or investigate a very limited number of key generic factors (economic dependence, competition and NAS) using ...