Whither and Whether Auditor Independence
46 Pages Posted: 17 Jun 2009
Date Written: June 15, 2009
Although the term 'independence' is used to describe the expected relationship between the auditor and its client, there is an inherent lack of independence in such a relationship arising out of the fact that the client pays the auditor - the very same auditor that 'must' be 'independent' of the client. While most literature on the subject either ignores the inherent lack of independence or views it as an institutional constraint beyond modification, I maintain here that it is, in fact, the most important issue to any discussion of the proper role for auditors. Although there are arguments for auditor "dependence" on grounds of economic efficiency, this paper contends that the quality of an audit (not just its efficiency) may also be improved by non-independence. Alternatively, Financial Statement Insurance (FSI) could provide an effective bypass to the independence problem and also position insurers to take on a more robust financial intermediary role. Instead of offering a sweeping reform of independence itself, I focus on the FSI literature as offering a way to avoid the independence problem, at least for companies which elect to have FSI.
Keywords: auditor independence, accounting, corporate governance
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