UK investors’ perceptions of auditor independence

Abstract

The purpose of an auditor's role in society is to validate the truthfulness of financial statements. In order to perform their role, it is essential that auditors are independent of the client company and are not seen to have any motive for none disclosure of misleading information (Lavin, 1977:237). If owners of organisations doubt the auditor's independence, financial statements will lack credibility. However, despite independence lying at the heart of the auditing profession, independence concerns can be traced back to the 19 th Century. During this time the accounting profession has found it difficult to produce a system of standards which eliminate conflicts of interest and protect auditors' independent mental attitude. In the UK, auditor independence concerns were heightened as a result of the scandals and corporate collapses which took place in the 1980s and 1990s (e.g. Maxwell, BCCI, Polly Peck, Barings Bank and Lloyd's of London). Since these scandals, much has changed in the 'environment within which auditing services are bought and sold' (Beattie and Fearnley, 1994:301), including the concentration of the audit market from the Big Eight auditors to the Big Four auditors and yet another, more recent, wave of high profile accounting scandals (e.g. Enron and WorldCom). Such changes have provoked new audit regulations. For example the Sarbanes-Oxley Act (2002) in the USA and the Auditing Practices Board's (2004) 'Ethical Standards for Auditors' in the UK. This questionnaire-based study conducted in 2005 focuses specifically upon how investors perceive some of the main auditor-client relationships that may have contributed to the collapse of Enron: the joint provision of audit and non-audit services, an audit firm's economic dependence upon a client and long relationships between auditors and clients, in order to determine whether, in the current climate, owners still have faith in the role of the auditor. The results suggest that, similar to previous UK perceptions based work (e.g. Firth 1980, 1981), economic dependence and the provision of non-audit services are perceived as greater threats to auditor independence than a long auditor-client relationship. In general, private investors and those without accounting qualifications displayed t he most concern about auditor independence issues. However, all investors perceived the current 'Ethical Standards for Auditors' as sufficient safeguards for their investments and indicated that the introduction of further regulation was not necessary.

Perceived auditor independence and audit firm fees

“…However, subsequent studies suggest consistent independence concerns over high NAS among US loan officers (Lowe andPany 1995, Bartlett 1997) and their UK equivalents (Beattie et al 1999). Recent qualitative research suggests that independence concerns arising from NAS provision, and from economic dependence in general, were common among UK investors in the period that we study (Dart, 2011). 7 Meanwhile experimental studies support these findings of independence concerns among users (Dopuch et al 2003, Davis andHollie 2008).…”

“…There is no reason to assume that research findings translate identically to different institutional or regulatory settings (Francis 2006, Gwilliam 1987). Dart's (2011) qualitative study suggests that while independence concerns are common among UK investors, they are not universal, and the strength and impact of those concerns over time remains unknown. Francis (2006) observes that although overall the literature suggests that NAS can adversely affect the appearance of auditor independence, there has been a pronounced tendency to examine NAS in isolation from their broader contracting environment, and in particular from audit fees.…”

Auditor Tenure and Perceived Earnings Quality

“…Following the results of surveys by Hartley and Ross () and Shockley (), financial analysts do not rate auditor tenure as an important threat to auditor independence. However, Dart () finds differences in the level of concerns about auditor tenure between institutional and private investors in the UK. Approximately 50 percent of the private investors would support the idea of a mandatory auditor rotation to strengthen auditor independence, whereas the overwhelming majority of institutional investors disapprove of an auditor rotation rule due to higher audit costs.…”

An Experimental Analysis of the Effects of Non‐audit Services on Auditor Independence in Appearance in the European Union: Evidence from Germany

“…Numerous studies investigated the effect of the provision of non‐audit services on independence in appearance. These studies are based on (1) surveys (e.g., Beattie et al., ; Canning and Gwilliam, ; Quick and Warming‐Rasmussen, , Quick/Warming‐Rasmussen ; Dart, ), (2) experiments (e.g., Lowe et al., ; Patel and Psaros, ; Swanger and Chewning, ; Hill and Booker, ), and (3) archival data (e.g., Chaney and Philipich, ; Frankel et al., ; Ashbaugh et al., ; Krishnan et al., ; Francis and Ke, ; Gul et al., ; Khurana and Raman, ; Lim and Tan, ; Lai and Krishnan, ; Chahine and Filatotchev, ). The latter category mainly consists of capital market reaction studies.…”