Synopsis

Independence is the cornerstone of auditing. Throughout the twentieth century, the AICPA and SEC adopted progressively stricter rules governing auditors’ relationships with their clients. In spite of these rules, significant numbers of investors harbored doubts about whether auditors were sufficiently independent of their clients. Accounting critics questioned the propriety of: (1) clients selecting and paying their own auditors, (2) auditors accepting jobs with their former clients, (3) public accountants performing management advisory services for their audit clients, and (4) accounting firms entering into joint ventures with their audit clients.

Discussion Questions

1. Why is it important that auditors maintain independence in appearance as well as in fact?
2. In what ways might mandatory audit firm rotation increase auditor independence and improve audit quality? What reasons did the leaders of the Big Six accounting firms give for opposing mandatory audit firm rotation?
3. How is auditor independence threatened when auditors accept jobs with former audit clients?
4. How might auditors’ performance of management advisory services erode their perceived independence? How might management advisory services improve audit quality and efficiency?
5. Why does section 602.02g of the SEC’s Codification of Financial Reporting Policies forbid direct business relationships between public accounting firms and their publicly traded audit clients?
6. What events led to the establishment of the Independence Standards Board?