The Impossibility of Auditor Independence

In: Business and Management

Submitted By gishli
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The Impossibility of Auditor Independence
* Investors seriously rely on audited F.S. and auditor integrity. * Audit firms face lawsuits from investors, paying judgments and settlements for their involvement in financial reporting process. * Audit failures rarely result from the deliberate collusion of auditors with client. Instead, auditors may find it psychologically impossible to remain impartial and objective. * AICPA: auditors should achieve a level of independence * Courts’ view: auditors must act in the interest of external users of F.S. * However, such impartiality is impossible under current institutional arrangements.
The Structure of the Auditing Relationship
External users:
Stockholders, financial advisers, regulators, lenders, creditors, etc.
Client (audited firm): has incentives to present the “best” F.S.

Hires and pays

Independent auditor:
Give an opinion on F.S.

* Through an qualified audit report, management provides external users a reasonable assurance. * Economic incentives also may bias an auditor’s judgment. The Psychology of the Impossible of Independence * Model of auditor psychology: Assumption of deliberativeness: any tendency towards bias can be rectified by moral suasion and/or the threat of sanctions. * Psychological research: the Model is unrealistic. * “self-serving” bias: when presented with identical information, individual perceptions of a situation differ dramatically depending on one’s role in the situation and self-interest * Three experiments
Issues that exacerbate the problems of independence: Subjective reasons: * People tend to be less concerned about harming a statistical victim than a known victim. An auditor doesn't really know who will be harmed by misinformation, but he or she does know the people in the firm who…...

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