Page 49 - DCOM204_AUDITING_THEORY

Unit 3: Roles and Independence of Auditor

This position runs head-on into the official description of the importance of the appearance of Notes
independence stated as follows in AU section 220.03:
It is of utmost importance to the profession that the general public maintains confidence in the independence
of independent auditors. Public confidence would be impaired by evidence that independence was actually
lacking, and it might also be impaired by the existence of circumstances which reasonable people might
believe likely to influence independence. To be independent, the auditor must be intellectually honest; to be
recognized as independent, he [or she] must be free from any obligation to or interest in the client, its
management, or its owners.

This rationale for the importance of the appearance of independence has been part of the official
description of audit independence since at least 1963, when Statements on Auditing Procedure
were codified with auditing standards. However, in the spirit of Elliott and Jacobson’s challenge
to look afresh at even historically revered notions, let’s examine this description more closely.
Does the concept of appearance of independence belong in a conceptual framework of auditing
and audit independence?
A highly regarded previous attempt to develop a conceptual framework for auditing is found in
R. K. Mautz and H. A. Sharaf’s ‘The Philosophy of Auditing’. Mautz and Sharaf develop a concept
of independence with two components: practitioner-independence and profession-independence.
Practitioner-independence is a state of mind and equates to the notion of the integrity and
objectivity of the individual auditor. Profession-independence is the apparent independence of
auditors, as a professional group, to the public.

The appearance of independence can be evaluated at two levels—the user’s perception of the
individual auditor’s ability to be independent in particular unique circumstances and the general
public’s view toward public accountants as a professional group. Both levels exist in the
authoritative auditing literature, but auditing standards attach the greatest significance to
profession-independence. “It is of utmost importance to the profession that the general public
maintains confidence in the independence of independent auditors”. This reference is clearly to
auditors as a professional group.
The logic of Elliott and Jacobson works only at the individual auditor level. If users are aware of
all of an auditor’s relationships and interests with respect to an audit client and believe there is
something that creates an appearance of lack of independence, the situation can be avoided.
They can “walk away,” as financial analysts generally say they do, at any sign of an independence
problem.
The same logic does not work at the profession level. If investors and creditors begin to view
auditors as a professional group as lacking in independence, if they are viewed as client advocates,
then as the U.S. Supreme Court concluded (in United States v. Arthur Young), “The value of the
audit function itself might well be lost.”
For this reason, the appearance of independence is an appropriate subject for regulation.
Appearance of independence can, as described earlier, affect perceived information risk and
thereby reduce the cost-effectiveness of the capital markets.

3.2.3 Integrity, Objectivity and Independence are not Mutually
Exclusive

Elliott and Jacobson put forward a view of integrity, objectivity, and independence that makes
them distinct, mutually exclusive concepts rather than interdependent qualities. In their
formulation, the only requirements for a quality audit are for the auditor to be competent and
objective. As they state the relationships, “Objectivity can result from perfect integrity (despite

LOVELY PROFESSIONAL UNIVERSITY 43