53 Pages Posted: 27 Jun 2006
As recent scandals have demonstrated, ensuring the independence of auditors from the publicly traded clients whose books they inspect is one of the most vexing problems in the financial world today. Arguably, the imposition of a mandatory audit system through the 1930s federal securities laws created the modern problem of auditor independence. Since then, numerous attempts to fix the problem have failed. The core issue is that the statutory audit is simply a commodified cost of doing business for issuers that imposes an impossible obligation to serve an unspecified "investing public" on the auditors. Yet, this investing public neither hires, fires, nor controls the auditors. Instead, the audit relationship is managed by the board of the company being audited. The resultant conflict of interest has proven to be insurmountable even after multiple reform efforts. The conceptual solution is to both "decommodify" the audit and place control of it squarely in the hands of shareholders. To achieve this, the author proposes a tripartite remedy: first, the SEC should retire its "statutory audit" rules under the 1934 Securities Exchange Act (while retaining the public offering audit requirements of the 1933 Securities Act) in favor of market-driven private audits; second, state corporations law or federal securities law should be altered to give an express audit right to shareholders that they would exclusively control, with expenses reimbursed by the company; and third, the licensing and regulation of CPAs must be strengthened and either harmonized or unified.
Keywords: audits, auditors, auditor independence, Sarbanes-Oxley, accounting, shareholder rights, statutory audit, securities law, corporations law
JEL Classification: M49, G18, G38, K22, M40, Z13
Suggested Citation: Suggested Citation
O'Connor, Sean M., Strengthening Auditor Independence by Reducing the Need for It: Reestablishing Audits as Control and Premium Signaling Mechanisms. Washington Law Review, Vol. 81, 2006. Available at SSRN: https://ssrn.com/abstract=911881