Magazine article The CPA Journal

Does Being the Auditor Impair Independence?

Magazine article The CPA Journal

Does Being the Auditor Impair Independence?

Article excerpt

The cornerstone of the audit (attest) function is auditor independence. In the wake of recent accounting scandals, one area that has received a lot of attention is whether nonaudit services to audit clients would automatically impair independence by virtue of appearance, without consideration of whether nonaudit services can be objectively proved to impair independence. How the public perceives such services continues to be much studied, and the Sarbanes-Oxley Act took a significant step by forbidding auditors to provide a number of services to audit clients.

Coverage and discussion of the Enron scandal tends to focus on the length of the relationship between Andersen and Enron and the additional services rendered by Andersen to Enron, and whether those revenues impaired Andersen's independence (and presumably its objectivity and judgment). If the additional services did not impair actual independence, they certainly impaired the perception of independence. An auditing environment where the public has faith in the product (financial statements) requires both actual and perceived independence.

But even if no additional services were rendered by Andersen to Enron, Enron likely would still have failed. Even without the additional revenue from nonaudit services as a reason for Andersen to relax its professional judgment, as some have alleged, the audit fees paid to Andersen by Enron represented a substantial portion of the revenue of the servicing office. In the public process of unraveling this scandal and leveling blame, it would not be a far stretch to infer that Andersen's independence would be questioned simply because of the size of the audit fee. That is, the impairment would arise simply because the client paid a fee to the auditor.

Audit firms are businesses. Partners and staff work long and hard to achieve success, which manifests itself in their financial compensation. …

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