Auditor Independence: An Impossible Dream
In recent months there has been much discussion about the independence of CPA auditors; the leadership of the AICPA, the Auditing Standards Board, the Public Oversight Board, the Independence Standards Board, and most recently the proposed independence rules promulgated by the SEC have all attempted to clarify and strengthen auditor independence. Several newspaper and magazine articles have also addressed the issue. In my opinion, all the efforts to tinker with rules of stock ownership by relatives of CPAs and restrict the scope of services provided to attest clients will fail to bring auditor independence until the biggest strain of all on auditor independence is acknowledged and properly dealt with—the fact that the client pays the audit fee.
The ideal of auditor independence has been clearly stated for a long time. The second general standard of Generally Accepted Auditing Standards states that “In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.” In spite of all that has recently been said and written about the matter, I believe the best explanation of independence is contained in Paragraph 2 of Section 220 of Statement on Auditing Standards #1. It states that the auditor “must be without bias with respect to the client under audit”. Further, “independence does not imply the attitude of a prosecutor but rather a judicial impartiality”.
Since the internal auditor is an employee of management and is dependent on management for raises and promotions, it may be argued that he/she will be biased in favor of management. On the other hand, an agent for the Internal Revenue Service may be expected to have a prosecutorial bias. The public accounting profession has held itself out as the group of auditors with the impartial mental attitude. In an ideal world this may be the case, but in reality I will argue that these auditors may be...