The Future of Auditor Independence

Source: The CPA Journal

Auditor independence was profoundly affected by the elimination of the ethical restraints on marketing in the 1970s. The AICPA was forced to change its Code of Conduct because anti-trust actions held them to be in restraint of trade. Because of the resulting competitive bidding for audits, CPA firms had to find ways to reduce audit fees and replace them with fees from other services. In addition, firms sought to reduce costs of performing audits, and one way to do this was through risk-based auditing. But auditors are not always able to identify the riskiest aspects of a client’s operations, and risk-based auditing diminished their ability to detect fraud.

Both these factors may have influenced some CPAs to neglect their obligations to third-party users of financial statements.

While independence may be in the auditor’s best interest in the long term, the pressure to retain a firm’s very good client may overwhelm its view of the long term.

Sarbanes-Oxley prohibits certain specific non-audit services by auditors of public companies, but these prohibitions do not assure an increase in auditor independence.

Some CPAs have asserted that by providing non-audit services they gain a better understanding of clients’ systems and, therefore, perform better audits. But others say auditors cannot objectively audit systems they have created.

The article maintains that auditors should not be advocates for their clients, and that management should not have the power to influence the audit committee. The latter is provided for in Sarbanes-Oxley, but there are no enforcement provisions. The former is not included in Sarbanes-Oxley.

From The CPA Journal, August 2005. For the complete article, click on the following link: http://www.nysscpa.org/cpajournal/2005/805/infocus/p22.htm.