Auditor Independence: A Burdensome Constraint or Core Value?

Abstract

The U.S. Securities and Exchange Commission (SEC) delegates to private standards-setting bodies much of its accounting-related rule-making authority under the securities acts. It has long delegated, while maintaining oversight, authority to set generally accepted accounting principles (GAAP) to the Financial Accounting Standards Board, and authority to regulate generally accepted auditing standards (GAAS) to the AICPA’s Auditing Standards Board. Recently, through Financial Reporting Release No. 50 (issued February 18, 1998), it delegated authority to define auditor independence to the Independence Standards Board (ISB). Accounting and auditing standards have been the subject of much scholarly research, but independence standards are relatively unexplored. All three are essential to determining the value of our system of audited financial reporting for investor protection, as well as its value for corporate governance, and for facilitating capital formation. This commentary explores two views of independence, and how the views might be applied by practitioners, regulated by regulators, and studied by scholars. The views are based on my experience with the accounting profession as a member of the Auditing Standards Board and the Special Committee on Assurance Services (the Elliott Committee), as well as teaching auditing for M.B.A.s and accounting majors for more than 25 years.