Perceptions-of-Auditor-Independence

PerceptionsofAuditorIndependence:U.K.EvidenceVivienBeattieRichardBrandtStellaFearnleyTherealityandperceptionofauditorindependenceisfundamentaltopublicconfidenceinfinancialreporting.AnewIndependenceStandardsBoardwassetupintheU.S.in1997andtheEuropeanUnion(EU)iscurrentlyseekingtoestablishacommoncoreofindependenceprinciples.Thegeneralsettingwithinwhichauditdecisionsaremadeandindependenceperceptionsareformedisevolvingrapidlyduetocompetitiveandregulatorychanges.Policy-makersmustworkcontinuouslytoevaluatethecriticalthreatfactorsanddevelopappropriateindependenceprin-ciples.ThispaperexploresthepotentialofrecentregulatoryreformsintheUnitedKingdom(U.K.),manyofwhichareuniquetothatcountry,tostrengthentheindependenceframework.Usingaquestionnaireinstrument,U.K.interestedparties’perceptionsoftheinfluenceonauditorindependenceofalargesetof45economicandregulatoryfactorsareelicited.Mostfactorshaveasignificantimpactonindependenceperceptionsforallgroups(financedirectors,auditpartners,andfinancialjournalists).Theprincipalthreatfactorsrelatetoeconomicdependenceandnon-auditserviceprovision,whiletheprincipalenhancementfactorsrelatetoregulatorychangesintroducedintheearly1990s(theexistenceofanauditcommittee,theriskofreferraltotheFinancialReportingReviewPanelandtherisktotheauditfirmoflossofRegisteredAuditorstatus).Exploratoryfactoranalysisreducesthefactorsettoasmallernumberofuncorrelatedunderlyingdimensions.©1999ElsevierScienceInc.Allrightsreserved.KeyWords:auditcommittees;auditorindependence;auditregulation;conflict;non-auditservicesINTRODUCTIONIndependenceisseenbytheChairmanoftheAICPAas“thecornerstoneoftheaccountingprofessionandoneofitsmostpreciousassets”(Mednick,1997).ForVivienBeattiecDepartmentofAccounting,FinanceandLaw,UniversityofStirling,Stirling,UK,FK94LA;Phone:[phone];Fax:[phone].JournalofInternationalAccounting,Auditing&Taxation,8(1):67–107ISSN:1061-9518Copyright©1999byElsevierScienceInc.Allrightsofreproductioninanyformreserved.severaldecades,theprofessionhasstrivencontinuouslytomaintainaneffectiveindependenceframeworkinthefaceofnewpressuresandthreats.Inrecentyears,accountingfirmshaverespondedtothestagnantmarketforauditservicesandincreasedcompetitionbyseeking,andachieving,growthintheprovisionofnon-auditservices(NAS).1ThiscompetitiveenvironmentandtheprovisionofNASresultedinrenewedconcernaboutauditorindependenceamonginterestedpartiesinmanycountries[forexample,GAO(1996)intheU.S.andICAS(1996)intheU.K.].In1997,theAICPAandSECsetupanewprivate-sectorbody,theIndependenceStandardsBoard(ISB),toestablishindependencestandardsfortheauditorsofpubliccompanies.TheEUiscurrentlyseekingtoestablishacommoncoreofindependenceprinciples(ECGreenPaper,1996).Auditorindependenceisrecognisedtohavetwodistinctdimensions:inde-pendenceinfact,whichisanunbiasedmentalattitudeoftheauditor,andindependenceinappearance,whichistheperceptionbyareasonableobserverthattheauditorhasnorelationshipwithanauditclientwhichwouldsuggestaconflictofinterest(AICPA,1993).Researchhasfocuseduponidentifyingthefactorswhichpotentiallyinfluenceindependence,andassessingtheirimpactuponper-ceivedindependencesinceindependenceinfactisunobservable.Empiricalstud-iesdatefromthemid-1960s(Schulte,1965)andtypicallyemployamailques-tionnaireapproach.Earlystudies,conductedbefore(orjustafter)morerigorousethicalguidelinesonindependenceissueswereputinplacebymanycountriesinthe1970s,focusedonspecificauditor-clientrelationshipsinthefourareasoffees,personalrelationships,financialinvolvement,andconflictsofinterest.Severaloftheserelationships,whichtwentyyearsagowereconsideredacceptable,havenowbeenproscribedformanyyears(e.g.,ownershipofsharesinclient).Sincethen,studieshavefocusedontheimpactofchangesintheeconomicandregulatoryenvironmentinwhichaccountingandauditingtakesplaceandinwhichindepen-denceperceptionsareformed.Thefourthemesnowcommonlyaddressedaretheeconomicdependenceoftheauditorontheclientcompany,auditmarketcom-petition,theprovisionofNAS,andtheregulatoryframework.Ofthese,economicdependenceandNAShavegrowninsignificancesincetheearlystudies,bothinabsoluteterms(duetothechangingenvironment)andbecauseoftheregulatorychangeswhichhaveremovedotherconcerns(i.e.,specificauditor-clientrelation-ships).Competitionandchangesintheregulatoryframeworktoenhanceauditorindependenceperceptionsaremorerecentissues.Threekeythemesaresuffi-cientlygeneraltopermitbroadcomparativeanalysisacrosstimeandcountries(economicdependence,competition,andNAS),whiletheaccountingandaudit-ingregulatoryframeworkisuniquetoeachcountryatapointintime.Sincethegeneralsettingwithinwhichauditorindependenceperceptionsareformedissubjecttocontinuouschange,policy-makersmustconstantlyaddressnewthreatfactorsandseeknewregulatorysafeguards.Reformoftheregulatoryframeworkforaccountingandauditing,andoftheethicalguidelines,isanongoingprocess.Duringtheearly1990s,anumberofsignificantchangeswere68INTERNATIONALACCOUNTING,AUDITING&TAXATION,8(1)1999introducedintheU.K..Inparticular,anewprivate-sectorstandard-settingandenforcementprocesswassetup,acoderelatingtothefinancialaspectsofc