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Auditor independence is often referred to as the cornerstone of the auditing profession because it is the foundation for the public's trust in the attest function. Although many have stated that the collapse of Enron has negatively affected the perception of auditor independence, we do not need to rely on anecdotal evidence alone. In October 2001, approximately two months prior to Enron declaring bankruptcy, an extensive survey instrument on auditor independence had been sent to 1,500 CPAs. After Enron declared bankruptcy in December 2001, the survey was sent to another 1,500 CPAs drawn from the same database.
The results indicated that CPAs' perceptions of the effects of nonaudit services on auditor independence are more negative after the Enron bankruptcy. In addition, after Enron declared bankruptcy, CPAs held a more conservative view of whether a material transaction or event detrimentally affects auditor independence. Furthermore, the findings suggest that auditors perceive that nonaudit services and other issues that threaten auditor independence detrimentally affect the public's perception of independence to a greater extent than they adversely influence actual independence.
A Discussion of Auditor Independence
Auditor independence helps to ensure quality audits and contributes to financial statement users' reliance on the financial reporting process. Several major instances of misstated earnings prompted the SEC in 2000 to adopt rules prohibiting nonaudit services inconsistent with auditor independence.
Auditor independence has long been couched in terms of independence "in fact" and independence "in appearance." An auditor who is independent in fact has the ability to make independent audit decisions even if there is a perceived lack of independence or if the auditor is placed in a potentially compromising position. Nonetheless, even when the auditor is in fact independent, one or more factors may lead the public to believe the auditor does not appear independent. This may cause users of financial statements to believe they cannot rely on financial information.
Because auditor independence in fact is a mental state, investors and other users of financial statements cannot accurately assess actual auditor objectivity; they can only evaluate an auditor's appearance of objectivity. Thus, even when an auditor acts independently in fact and issues an unbiased audit opinion, investor confidence is eroded if investors and other users of the financial statement information do not perceive...
