The Future of Accounting, Part Reliability and Auditor Independence.

Abstract In this third Commentary on the Future of Accounting and Financial Reporting, the author examines auditor independence. Acknowledging the importance of auditor independence to the reliability of accounting information, the author argues that the current paradigm for assessing independence issues needs to be made both more comprehensive and more comprehensible in order to advance the public interest. He asserts that the current approach is both under and over inclusive because it does not adequately address independence concerns related to traditionally accepted audit and related activities while it precludes, without good reason, various nontraditional services, including services that might advance the public interest. The author advocates an alternative model for assessing independence issues that focuses on auditor dependence. Under the proposed approach, the focus would be on (1) the individual, office, or other unit of the firm making audit decisions, (2) whether a relationship or activity has the potential to create a dependency that could bias auditing judgments, (3) whether the potential for dependence is such that independence can nevertheless be maintained through reasonable measures (in which case, such measures would be required and the activity permitted) and, if it cannot be, (4) whether the benefits to the audit process of the relationship or activity outweigh the potential independence concerns. Compared to the current approach, this alternative model is more clearly articulated, more comprehensive and easier to instill as a culture in a firm. Moreover, in an era of rapid change in the business world, the alternative should result in more reliable accounting information. It will also allow firms to provide their clients with cost-effective services that do not truly raise independence concerns. In sum, this new approach would effect a change in thinking about independence issues from what is allegedly consistent with a public duty, to what is in the public interest.