Being the Auditor Impair Independence?
Jeffry R. Haber
2005 - 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.
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.
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.
firms are businesses. Partners and staff work long and hard
to achieve success, which manifests itself in their financial
compensation. The money for all this comes from clients
paying for audit, tax, consulting, and other services. If
each audit client purchased no other services, the audit
fee would represent the only element of revenue. The maintaining
and satisfying of clients is important, and such criteria
are used in manager and partner evaluations.
is not to say that firms would risk a lawsuit or purposely
renege on their professional duties; neither should they
backseat their professional duty when receiving consulting
revenue. The underlying question becomes: When so much revenue
is being realized, can any business firm properly exercise
the standard of professional care? This question exists
even when a firm receives only audit fees.
auditor-client relationship is unique in professional services.
Auditors are hired and paid by the client, but their product
is really for use by the public, to whom they owe a standard
of care. Auditor rotation has been proposed as a solution,
and although it is a step in the right direction, it does
not go far enough. Having the stock exchanges (or the SEC
or another oversight body) be responsible for hiring and
paying the auditors would remove the potential for independence
the goal is to increase the public’s perception of
auditor independence, then the company being audited can
no longer be the client. Another party must contract for
the audit, pay the auditor, and become the client. Then
there would be no perceived or actual impairment of auditor
independence. All other solutions being discussed still
leave open the potential for questioning independence, and
therefore for undermining the usefulness of the audit process.
R. Haber, PhD, CPA, is an assistant professor of
accounting at the Hagan School of Business of Iona College,
New Rochelle, N.Y.