“Public faith in the reliability of a corporation’s financial statements depends upon the public perception of the outside auditor as an independent professional. If investors were to view the auditor as an advocate for the corporate client, the value of the audit itself might well be lost.” (Warren Burger, U.S. Supreme Court Justice)
Examples of Independence Violations:
“EY Settles SEC Case in $2.8 Million Pact,” Judith Burns, Wall Street Journal (August 7, 2008): C5. Ernst & Young was sanctioned by the SEC for paying Mark Thompson to produce promotional materials while Thompson served as a director of three EY audit clients.
“EY Gets SEC Penalty for Ties to Client,” Jonathan Weil, Wall Street Journal (April 19, 2004): A3+A8. Ernst & Young was banned from accepting new publicly-traded audit clients for six months after entering into a joint venture with audit client PeopleSoft.
“Did Ties That Bind Also Blind KPMG?” Cassell Bryan-Low, Wall Street Journal (June 18, 2003): C1+C5. KPMG paid referral fees to audit client First Union for directing wealthy customers to KPMG’s tax shelters. KPMG was disciplined previously for lending money to an audit client and for investing in a client-operated mutual fund.
“This Scandal Changes Everything,” Pamela Moore, Business Week (February 28, 2000). After investigators discovered more than 8,000 independence violations by PricewaterhouseCoopers employees, SEC Chairman Art Levitt proposed major revisions to the agency’s auditor independence requirements.
Proposals to Enhance Auditor Independence:
“PCAOB Hears Pros and Cons of Audit Firm Rotation,” Michael Cohn, AccountingToday.com (March 22, 2012). This article discusses and potential advantages and disadvantages of mandatory audit firm rotation.
“Of Fiddlers and Tunes,” Robert Sack & Mark Haskins, The CPA Journal (June 2003): 10-11. This article recommends that the stock exchanges hire and compensate the auditors who audit their listees’ financial statements.
“A Market Remedy for Our Nasty Accounting Virus,” Susan Lee, Wall Street Journal (July 10, 2002). This article describes a proposal to have corporations purchase “financial statement insurance” and have the insurance companies hire the auditors.
“If You Need Love, Get a Puppy: A Case Study on Professional Skepticism and Auditor Independence,” Robert Braun & H. Lynn Stallworth, Issues in Accounting Education (May 2009): 237-252. A staff auditor discovers that his best friend’s wife is embezzling from an audit client.
“Auditor Independence: A Focus on the SEC Independence Rules,” Audrey Gramling & Vassilios Karapanos, Issues in Accounting Education (May 2008): 247-260. Five short cases require students to assess whether the auditor complied with SEC independence rules.
“Educational Interventions for Teaching the New Auditor Independence Rules,” Helen Roybark, Journal of Accounting Education (2008): 1-29. A series of research-writing assignments, cases, videos, and game activities to teach auditor independence rules.
“Thinking Outside of the Box (of wine, that is): An Exercise in Independence,” Robert Richardson, Issues in Accounting Education (August 2004): 363-367. Uses the example of a wine critic to illustrate the importance of auditor independence.
“Policy and Research Implications of Evolving Independence Rules for Public Company Auditors,” Audrey Gramling, J. Gregory Jenkins & Mark Taylor, Accounting Horizons (December 2010): 547-566. This article summarizes research studies related to the effects of auditor-client employment relationships, audit fees, auditor rotation, nonaudit services, and audit committees on auditor independence.