Q: Identify the reasons why auditor independence is considered so important to

the audit of financial statements and describe and evaluate the necessity of measures
that have been introduced in the UK and EU with the objective of enhancing auditor
independence.

Name argues in his study that “where the function of Accountant ends, audit
begins to determine the true and fair picture of such accounts”. The overall objective
of the auditor is to enhance the confidence degree of intended users in the financial
statements. As long as the auditors gather enough appropriate audit evidence, the
result is therefore achieved (IAS 200). Given that the auditor is engaged to serve the
public trust, it is vital to the audit function that auditors engaged in an attestation be
independent of the client.

Independence refers to the auditor’s ability to present his honest and impartial
opinion about the reliability of financial statements, regardless of his interest or the
clients’ pressure (Ahmad, 1985). Independence can be either in mind, or in
appearance. An auditor who is independent in mind is unbiased. There are times when
actual bias could occur, like in the case of an auditor with shares in a client’s
company who allows that client to engage in overly aggressive accounting, leading to
the increase of the company’s stock price. Unlike actual bias, independence in
appearance is based entirely on perceptions. If we were to consider the case of ten
shares owned by a staff accountant who is not personally involved in the engagement
but who works in the same office as the audit team, it is unlikely that this situation
would affect the outcome of the audit. However, the fundamental problem is that
independence in fact can be observed. Though imperfect or inaccurate, the public’s
perceptions seem to be the only practical measure of auditor independence. Therefore,
independence in both fact and appearance is crucial to maintaining professional
autonomy and the high esteem in which the profession is held. Nonetheless, there are
other qualities needed in auditing, like competence and auditing techniques. Auditing
arises from conflicts of interest. In case the auditors are not independent or are not
perceived to be by the users of financial reports, their opinion will lack credibility,
thus making their work insignificant. In addition, auditors must meet strict
requirements regarding their professional knowledge and their independence. An
expectation gap could occur, in case the two are not in harmony, since what the public
expects from the auditor might not be what the auditor provides. Consequently,
auditor independence becomes a keystone in today’s capital market.

However, on the other hand, independence is a state of mind partly synonymous

with honesty and integrity. (Carey, 1946). Since it is unobservable or measurable,
auditors have incentives to violate their independence through satisfying their clients
in order to maintain the economic bonding to the client (DeAngelo, 1981). Therefore,
to enhance auditor independence and improve audit quality, it is essential to take
some measures.
 Several mechanisms have been introduced in the UK and EU to mitigate the risks
of independence impairments. One of those is the restrictions on the non-audit
services that public interest entities (PIEs) in the EU can obtain from the statutory
audit firm and its network. The provision of NAS to audit clients potentially affects
auditor independence. It is posited that substantial fees earned from these activities
could make auditors more permissive thus allowing clients to employ practices that
would otherwise be reported to stakeholders (Francis, 2006). In the same way,
stakeholders would be sceptical about the independence of the audit report when they
know that the same auditors provide a significant amount of NAS to clients (Quick,
2009). The restrictions take the form of a cap on the amount of non-audit fee that can
be billed and a list of prohibited services that the auditor cannot provide. This
practice, to a large extent, contributes to addressing the threat of self-review, self-
interest as well as advocacy, thus reinforcing auditor independence together with
improving the users’ perception of auditor independence.

In addition, the practice of joint audit has been proposed by the European
Commission. This requires that at least one of the audit firms should be from outside
the Big 4. The mechanism enables new entrants into the audit market for large
multinational companies and helps to not only address the familiarity threat through
rotating the allocation of fieldwork between the joint auditors, but also reinforce the
professional scepticism. As a consequence, auditor independence is reinforced and
audit quality is improved.

As mentioned above, it is the function of independence as an attribute with

economic value that makes it essential for the audit of financial statements. Moreover,
the emergence mechanism of limitation on non-audit services, joint audit, and some
other proposals help to enhance audit independence and improve audit quality.