A key element of the Ontario Securities Commission's legislated mandate is to foster fair and efficient capital markets and confidence in those capital markets. In recent months, we have seen a growing erosion of public confidence in the reliability of the audited financial statement. We are told that sophisticated investors and analysts now place far less reliance on audited statements, preferring instead to develop their own independent views of a company's prospects. But the resources necessary to conduct such exercises are far beyond the means of the average investor. Although the reasons for this erosion in confidence in the audited statement are likely complex, I believe that a significant factor is a loss of confidence in the auditor as a figure sufficiently independent of company management.
Objectivity is fundamental to the integrity of the external audit.
Anything that dilutes either the reality or the perception of objectivity undermines the system. In Canada, for example, the rules of professional conduct for auditors require that they avoid any situation that impairs professional judgement or objectivity or that, in the view of a reasonable observer , would impair professional judgement or objectivity. The importance of the perception of auditor independence and objectivity cannot be overstated. Audited financial statements are the cornerstone of our disclosure system and the public has to come to place a large measure of reliance on them, in part because of the credibility lent by the report of an independent auditor. The inevitable greater scope for auditors to exercise discretionary judgement increases the need for independence in both fact and appearance.