Academic journal article Accounting Horizons

A Proposed Framework Emphasizing Auditor Reliability over Auditor Independence

Academic journal article Accounting Horizons

A Proposed Framework Emphasizing Auditor Reliability over Auditor Independence

Article excerpt

This paper introduces an auditor reliability framework that repositions the role of auditor independence in the accounting profession. The framework is motivated in part by widespread confusion about independence and the auditing profession's continuing problems with managing independence and inspiring public confidence. We use philosophical, theoretical, and professional arguments to argue that the public interest will be best served by reprioritizing professional and ethical objectives to establish reliability in fact and appearance as the cornerstone of the profession, rather than relationship-based independence in fact and appearance. This revised framework requires three foundation elements to control subjectivity in auditors' judgments and decisions: independence, integrity, and expertise. Each element is a necessary but not sufficient condition for maximizing objectivity. Objectivity, in turn, is a necessary and sufficient condition for achieving and maintaining reliability in fact and appearance.

Keywords: auditor independence; expertise; integrity; objectivity; reliability.

"The significant problems we face cannot be solved at the same level of thinking we were at when we created them."

--Albert Einstein


Recent high-profile business and audit failures, such as WorldCom, Enron, Cendant, Sunbeam, and Waste Management, created an unprecedented crisis in the accounting profession. The crisis in part stems from the concerns about auditor independence that existed for many years. Despite recent research, education initiatives, and regulatory efforts to reduce independence risk, (1) the auditing profession continues to suffer severe public criticism. This paper develops a new perspective on auditor independence that refocuses current and future research, practice, and policy making on what stakeholders' truly seek: auditor reliability.

The new auditor reliability framework proposed here repositions independence as one of three necessary but subordinate conditions, along with integrity and expertise, for maximizing auditor objectivity and, ultimately, auditor reliability. In this context, reliability refers to a condition where stakeholders consistently find the auditor's work and opinion credible and dependable. Our view is that auditor reliability rather than auditor independence is, or should be, the profession's "cornerstone" for protecting the public interest. Recent regulatory changes, high-profile business and audit failures, ongoing financial statement restatements, and the inherent limitations of independence as a professional cornerstone create an audit environment that compromises auditors' ability to serve the public interest and maintain public confidence.

We justify our emphasis on reliability as the new professional cornerstone because the fundamental goal of the audit is to provide assurance about the reliability of an entity's financial statements as specified, for example, in the Securities and Exchange Commission's final rule on auditor independence requirements (SEC 2001) and the Independence Standards Board's Exposure Draft on independence concepts (ISB 2000). Stakeholders expect financial statements to provide a reliable representation of the financial position, results of operations, and cash flows of the entity audited. Moreover, stakeholders will judge an audit effective if they consider the auditor's opinion about the fairness of the financial statements to be reliable. Our proposed conceptual framework therefore elevates the importance of reliability and relegates independence to a more realistic subordinate role.

Our framework is further motivated by our belief that extensive ongoing public criticism of the audit profession reveals the inherent problems caused by excessive focus on auditor independence as the profession's cornerstone. The American Institute of Certified Public Accountant's Code of Professional Conduct Rule 101 (AICPA 2002a) is the basis for the profession's independence rules. …

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