Is it time for auditor independence yet?

Abstract

In his 1984 ruling in the case of United States v. Arthur Young & Co., Supreme Court Chief Justice Warren Burger argued for the fundamental importance of auditor independence. Auditors, he wrote, played a watchdog role that is essential to the efficient operation of and public trust in capital markets: ‘‘This ‘public watchdog’ function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust.’’ Professional auditors have historically expressed similar views (Mautz & Sharaf, 1961). More recently, Nelson (2006) wrote, ‘‘Law requires that audits be performed by certified public accountants that are ‘independent’ of the company.’’ Independence is necessary to prevent auditors from biasing their opinions in favor of their clients. As Nelson (2006) argues, ‘‘auditors should strive for accuracy, or at worst strive for conservatism that introduces a slight negative bias to the client’s financial situation.’’ Creating an auditing system that delivers the independence it requires has not proven so simple. Consider the following two alternatives: