On the Operational Reality of Auditors' Independence: Lessons from the Field

Abstract

SUMMARY Auditor independence, which has certainly been one of the most addressed topics in auditing literature, is a complex and ambiguous construct that can be analyzed along two dimensions. The first dimension, organizational independence, relates to auditors' willingness to act in accordance with professional standards and to report errors found during the audit. The second dimension, operational independence, relates to auditors' capability to work diligently and effectively in order to detect material anomalies. Surprisingly, “much of the debate has [so far] focused on the former,” while the latter has remained largely “under-discussed” (Power 1999, 132), if not ignored. In this paper, based on ethnographic data and semi-structured interviews, we examine the realities of auditors' operational independence and discuss the practical and theoretical implications of our findings. Our evidence suggests that auditors' operational independence is both unsettled in practice and impossible to achieve through institutional measures alone. This view may challenge orthodox and regulatory conceptions of audit, but the smooth conduct of an audit engagement largely depends on the auditees' desire to cooperate. In order to arouse and maintain this desire, audit team members resort to a number of relational strategies that aim at securing their capability to work with diligence and efficacy, but that can also undermine their willingness to take enforcement action when necessary. Audit, therefore, appears to be a complex balancing act between capability and willingness. Ultimately, it is shown that because official arrangements designed to guarantee operational independence are unlikely to be effective, the reality of auditor independence remains highly uncertain and needs to be constantly negotiated and renegotiated in the field.

Clash of corporate governance logics obscuring auditor independence

“…The discourse in CGRs regarding audit committees in the subordination dimensions indicates that audit committees are in a position to pressure auditors in the selection of areas to be included in the audit plan. Here, the findings of the study are in line with Guénin‐Paracini et al () in their argument that auditees may be in a position to control or obstruct auditor access to information. The indications on audit committee involvement in auditor planning give cause for concern regarding auditors' abilities to attain knowledge for the planning and risk analysis without the auditees’ understanding and knowledge, which is a requirement for epistemic independence (Power, ; Scott, ).…”

“…Hellman's study was conducted during 2003–2004 (i.e., before the SwCGC took effect). Hellman () findings align with findings by Guénin‐Paracini et al (, p. 201), who demonstrated that “the smooth conduct of an audit engagement largely depends on the auditees' desire to cooperate.” Catasús, Hellman, and Humphrey () indicated that Swedish audit committees utilize the external auditor in their management of the company. Furthermore, there are indications in several studies that audit committee members are not always as knowledgeable and independent as regulations suggest (cf.…”

“…In addition, Guénin‐Paracini et al () explained that the relational character of the power balance between auditors and auditees necessitates some kind of protection for auditors against auditees' interference in the audit process. Protection against such interference includes auditors' capabilities to resist auditee pressures on both the selection of areas to be audited and the conclusions drawn from the procedures performed (Guénin‐Paracini et al, ). The type of independence that relates to auditors' capabilities to resist such auditee pressure has been denominated operational independence (Guénin‐Paracini et al, ; Power, ).…”

“…Protection against such interference includes auditors' capabilities to resist auditee pressures on both the selection of areas to be audited and the conclusions drawn from the procedures performed (Guénin‐Paracini et al, ). The type of independence that relates to auditors' capabilities to resist such auditee pressure has been denominated operational independence (Guénin‐Paracini et al, ; Power, ). A dimension of operational independence is epistemic independence, which means that in order to be epistemically independent the auditor needs to possess the ability to draw conclusions from audit procedures without the cooperation of the auditee (Power, ).…”

Auditor Face‐Work at the Annual General Meeting

“…; Guénin‐Paracini et al. ) prior to the AGM. Yet this endpoint has also been described as vulnerable (Pentland ; Power ; Barrett and Gendron ; Smith‐Lacroix et al.…”