The meaning of independence in the context of audit : demand and supply side interpretations

Accounting represents a process of communication, with this communication primarily achieved via the financial reporting function. Users of financial reports, though, may harbour doubts and uncertainties with respect to the accounting processes by which financial reports are constructed and with respect to the resulting quality of the communicated information. Auditors therefore fulfil an assurance role. A key reason they can fulfil this role is their independence from the managements of the entities they audit. This experimental study investigates the meaning of the concept of auditor independence utilising the measurement o f meaning (semantic differential) framework originally proposed by Osgood, Suci and Tannenbaum (1957). The research provides insight into whether there is shared meaning of the concept of auditor independence between key parties to the financial reporting communication process and the extent to which those meanings are affected by various potential threats to, and safeguards of, auditor independence. The threats and safeguards examined represent contemporary auditor independence issues. The experimental cases developed for the study allow examination of the impact on interpretations of auditor independence of alternative potential independence threats and safeguards. The potential auditor independence threats manipulated in the study were (a) non-audit services, (b) interlocking directorships among audit clients, (c) longer periods of audit firm tenure, and (d) a former audit firm partner being a director of the auditee company. The auditor independence safeguards manipulated were (a) additional external public oversight, (b) differing audit partner rotation periods, and (c) the presence of a local (internal) independence board within the audit firm. At a general level across all experimental cases, the three groups of research participants (auditors, financial report preparers and financial report users) were found to have a shared meaning of auditor independence. The major individual area in which there was a significant between-group difference in connotations (interpretations) of independence was that of the auditor provision of non-audit services. Analysis of the experimental cases indicated that (a) significant differences in connotations of an auditor’s independence existed between the auditor participants and the other two participant groups in the presence of audit firm provided non-audit services, even though the services were specified to comprise only traditional taxation services, (b) preparers and users exhibited equal independence concerns for low and high levels of taxation services, (c) in the presence of a high level of taxation services, none of the three participant groups perceived benefits to auditor independence from additional audit firm oversight by a public oversight board, (d) all groups perceived an adverse impact on auditor independence when interlocking directorships were present, (e) a longer period of audit firm tenure was not interpreted to adversely affect auditor independence when audit partner rotation policies exist, and this was unaffected by whether audit partner rotation occurred every four years or every seven years, (f) all participant groups agreed on the adverse impact on independence of a former audit firm partner being a director of the auditee company, even though it was specified that the former partner had not previously been involved in the audit of the auditee, and (g) the auditor and user participants agreed on the beneficial impact of the existence of a local independence board within the audit firm.