Auditor Independence in Canada: A Historical Perspective — From Shareholder Auditors to Modern‐Day Audit Committees*

Abstract

ABSTRACTThis paper uses the theoretical framework of Goldman and Barlev (1974) to examine auditor independence in Canada. It traces the historical development of the auditor's role in the 19th century and the beginning of the auditor's relationship with shareholders and management. It shows how, following the separation of management from shareholding, management's ability to influence auditors undermined auditor independence. The paper traces attempts by legislators and regulatory bodies to limit management's influence over auditors and to correct the asymmetry of their relationship. It notes that recent changes to legislation and rules of professional conduct are no longer proactive, but are reactions to corporate scandals in Canada and the United States. The paper argues that although future changes will occur to redress the imbalance, only structural changes are likely to provide a real solution to auditor independence problems. However, it is likely that such changes will be resisted by the accounting profession.