The Impact of Auditor Independence on the Reliability of Financial Statements

The independence of the auditor is viewed as a fundamental principle in auditing since it improves the objectivity and accuracy of the financial statements used by investors, creditors, regulatory agencies, and other stakeholders (DeAngelo, 1981; International Ethics Standards Board for Accountants [IESBA], 2023). Independent auditors should make professional judgments without any bias from the management in order to ensure that the financial statements do not contain any material errors (International Auditing and Assurance Standards Board [IAASB], 2023). This study explores the influence of auditor independence on financial statements reliability via the systematic review of the relevant literature, professional standards, and empirical research. Specifically, the study considers the influence of auditor tenure, non-audit fees, and audit quality on financial reporting credibility and reliability. The analysis of the reviewed literature suggests that auditor independence positively influences financial statement reliability by increasing the level of objectivity, transparency, and professional skepticism during the audit process (Knechel & Vanstraelen, 2007; DeFond & Zhang, 2014). Although longer tenure increases auditors' understanding of their clients' business, too much tenure can create familiarity threats and decrease independence (Knechel & Vanstraelen, 2007). In the same way, high non-audit fees can increase auditors' economic independence and reduce objectivity (Frankel, Johnson, & Nelson, 2002). On the contrary, high audit quality increases the confidence of the stakeholders through improved material misstatement detection and reporting (DeAngelo, 1981; IAASB, 2023). In light of this, it can be suggested that mandatory auditor rotation should be adopted when required, improved corporate governance practices, and professional ethics education be made a part of the audit process.