Independence is an Asset to the Auditor

The auditing profession loses its value when independence is compromised. Independence is a standard that relates to the auditors organization and the individual auditor.  Independence includes both independence in fact and appearance.  Even when an auditor is acting with integrity, if there is reasonable cause for a third party to believe that the results of the audit may be compromised, then independence in appearance does not exist.  Auditors maintain independence so that their opinions have validity.

If a CEO told you that his company was rock solid and that it was going to continue to make a tremendous amount of money, would you believe him?  If a major investor in a corporation said that the corporation was definitely worth investing in, would you invest?  If you were a consulting business that offered advice to your client, would you be able to be impartial in your audit of that client? We know that if someone has a vested interest in the success or failure of a company, he may not be able to give an unbiased opinion. If in fact he does give an unbiased opinion, it may still not carry any weight because in appearance he is not independent.

The fee the auditor receives can actually be the vested interest an auditor has in his client. The fee can affect his independence as well as the threat of losing the client.  For example, a decade later we will still hear about the Enron scandal.  We know the scandal affected the employees and investors of Enron, but it also had a horrible impact on the auditing profession and obviously their auditors Arthur Andersen, which was put out of business.

Arthur Andersen was charged with shredding thousands of documents and deleting e-mails and company files that tied the firm to its audit of Enron. In investigating Arthur Andersen, the concept of independence entailed a big part of the picture.  Was Arthur Andersen independent?  Many feel they were not, so even if they acted independently, their appearance was compromised.

Arthur Andersen received some $27 million in consulting fees from Enron, compared to $25 million in audit fees. We know that the fees an accounting firm receives can affect his independence, but when the fees from consulting services outweigh the fees from auditing there is a bigger problem.  Consulting fees offer a temptation for an auditing firm to not be objective.  Arthur Andersen’s consulting fees from Enron outweighed its audit fees; independence was compromised. The Enron scandal may seem like history, but the concept of independence is a standard that the auditing profession must actively follow if their profession is to survive.  There were five big accounting firms before the Enron scandal. 

As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.

Independence is a standard of the auditing profession that needs to be reviewed and evaluated constantly.  Independence is an asset to the auditor that earns the confidence of the public.  Without independence in fact or appearance the auditor’s findings are useless.