TY - JOUR

T1 - Auditor independence and audit risk

T2 - a reconceptualisation

AU - Fearnley, Stella

AU - Beattie, Vivien

AU - Brandt, Richard

PY - 2005

Y1 - 2005

N2 - The principles-based UK regulatory framework for auditor independence (Chartered Accountants Joint Ethics Committee 1996), which was adopted in 1997, identifies threats to independence in fact, independence in appearance, and the safeguards that control these threats. These principles are incorporated in the International Federation of Accountants (IFAC 2001) ethics framework. Drawing on six case studies of interactions involving significant accounting issues between audit engagement partners and finance directors in UK-listed companies, we analyze the threats and safeguards to auditor independence in fact that are relevant to the outcome of each interaction. Despite the UK's comprehensive regulatory framework for independence, audit quality control, and independent inspection of firms, not all the interactions have a fully compliant outcome. Independence in fact is compromised where the safeguards in the framework are insufficient defense against the threats, particularly regarding intimidation and bullying during the audit process. Further examples of existing threats are identified and additional threats emerge, in particular an urgency threat, and a loss of face threat. Management motivation is found to be a key driver of pressure. Threats to independence arising within audit firms are not recognized in the current UK audit risk model. An extended risk model incorporating within-firm risk is suggested. This study demonstrates the need for continual improvement to regulatory frameworks; in particular it supports the recent US Securities and Exchange Commission (SEC) rule on improper influence on the conduct of audits (Securities and Exchange Commission 2003a).

AB - The principles-based UK regulatory framework for auditor independence (Chartered Accountants Joint Ethics Committee 1996), which was adopted in 1997, identifies threats to independence in fact, independence in appearance, and the safeguards that control these threats. These principles are incorporated in the International Federation of Accountants (IFAC 2001) ethics framework. Drawing on six case studies of interactions involving significant accounting issues between audit engagement partners and finance directors in UK-listed companies, we analyze the threats and safeguards to auditor independence in fact that are relevant to the outcome of each interaction. Despite the UK's comprehensive regulatory framework for independence, audit quality control, and independent inspection of firms, not all the interactions have a fully compliant outcome. Independence in fact is compromised where the safeguards in the framework are insufficient defense against the threats, particularly regarding intimidation and bullying during the audit process. Further examples of existing threats are identified and additional threats emerge, in particular an urgency threat, and a loss of face threat. Management motivation is found to be a key driver of pressure. Threats to independence arising within audit firms are not recognized in the current UK audit risk model. An extended risk model incorporating within-firm risk is suggested. This study demonstrates the need for continual improvement to regulatory frameworks; in particular it supports the recent US Securities and Exchange Commission (SEC) rule on improper influence on the conduct of audits (Securities and Exchange Commission 2003a).

KW - independence

KW - risk

KW - threats

KW - safeguards

U2 - 10.2308/jiar.2005.4.1.39

DO - 10.2308/jiar.2005.4.1.39

M3 - Journal article

VL - 4

SP - 39

EP - 71

JO - Journal of International Accounting Research

JF - Journal of International Accounting Research

SN - 1542-6297

IS - 1

ER -