A Framework for Auditor Independence
The ISB lays a foundation for future guidance.
By Susan McGrath, Arthur Siegel, Thomas W. Dunfee, Alan S. Glazer and Henry R. Jaenicke January 2001
THE INDEPENDENCE STANDARDS BOARD issued an exposure draft for a conceptual framework for auditor independence containing the concepts and basic principles that will guide the board in its future standard setting. THE NEED FOR A FRAMEWORK AROSE FROM the jumble of confusing independence rules and regulations that applied to public companies and their auditors, many in the form of interpretations issued in response to specific independence questions. THE FRAMEWORK DEFINES AUDITOR INDEPENDENCE and identifies its goals. The ISB’s model for standard setters involves three steps: (1) identify threats to the auditor’s independence and consider their significance; (2) evaluate the effectiveness of potential safeguards, including restrictions; and (3) determine an acceptable level of independence risk. UNDER THE FRAMEWORK, THE GOAL OF INDEPENDENCE is “to support user reliance on the financial reporting process and to enhance capital market efficiency.” The goal looks beyond the immediate benefit of the auditor’s independence—unbiased audit decisions—to the broader targets of user reliance on the financial reporting process and enhanced capital market efficiency. ONE OF THE MOST CONTROVERSIAL ASPECTS of the auditor independence debate is the role that “appearance” should play in setting standards. The ED, in its discussion of the definition and goal of independence, specifies that the board and other standard setters should consider the perceptions of investors and other users of financial information. Susan McGrath, CPA, is a director at the ISB and ARTHUR SIEGEL, CPA, serves as the board’s executive director. Their e-mail addresses are firstname.lastname@example.org and email@example.com . Thomas W. Dunfee, the Joseph Kolodny Professor of Social Responsibility and vice-dean for the undergraduate division of the Wharton School of the University of Pennsylvania, advises the ISB on ethical matters. His e-mail address is firstname.lastname@example.org . Alan S. Glazer, CPA, professor of business administration, Franklin & Marshall College, is associate director of the conceptual framework project. His e-mail address is email@example.com . Henry R. Jaenicke, CPA, the C.D. Clarkson Professor of Accounting at Drexel University, is project director of the conceptual framework. His e-mail address is firstname.lastname@example.org . n November the Independence Standards Board (ISB) issued an exposure draft (ED) of a conceptual framework for auditor independence containing the concepts and basic principles that will guide the board in its standard setting. The framework defines auditor independence as “freedom from those factors that compromise, or can reasonably be expected to compromise, an auditor’s ability to make unbiased audit decisions.” It will help practitioners, investors, regulators and other standard setters understand the significance of auditor independence and provide a common language so that those involved in the ongoing independence debate can contribute to the development of ISB standards. The framework does not provide easy answers to specific independence questions but it supplies a structure and methodology for analyzing issues. This article describes the framework and some of the reasoning behind it. A HODGEPODGE OF REGULATIONS
The need for a framework arose from the jumble of confusing independence rules and regulations—many in the form of interpretations issued in response to specific independence questions—that applied to public companies and their auditors. The guidance in those interpretations, issued over the years and under changing circumstances, sometimes conflicted and lacked theoretical consistency. Auditors also faced challenges in applying such guidance if the facts and circumstances of an...
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