Auditor independence debate : a critical review of the UK and the US responses and proposed reforms to strengthen auditor independence in the wake of Enron-Andersen scandal

Abstract

This paper argues on auditor independence and its safeguarding tools developed to preserve independence in the wake of Enron-Andersen debacle. Likewise, the safeguarding tools aimed to strengthen auditor independence and to secure public's confidence in the credibility of the accountancy and auditing profession. Auditor independence has always been difficult to define despite its continuous debate for over three decades. Since Enron, in addition to current tougher independence regulations, more calls demanding further reforms to strengthen auditor independence have been received. This study attempts to discuss the proposals to strengthen auditor independence argued in the UK and the US. In the UK, the Co-ordinating Group on Audit and Accounting Issues (CGAA) was set up under the Department of Trade and Industry (DTI) to coordinate works of reviewing UK regulation in the light of Enron. While, in the US, the Securities and Exchange Commission (SEC) and The American Institute of Certified Public Accountants (AICPA) perform major regulatory works in response to the collapse. The main proposals discussed in this paper include: ban of non-audit services, establishment of tougher regulation and appointment of auditors by the state or agency. Responses towards the proposals between the two countries vary. This has much to do with the differing approach in standard-settings. The viability and practicability of the proposals are discussed. The paper indicates that the proposals have their own strengths and weaknesses in its objective to achieve maximum independence. On one hand, the proposals may mitigate impairment of auditor independence in the first instant. On the other hand, there are great possibilities that any new standards or guidelines could appear obsolete within short period. Then, regulatory reviews and reforms need to take place continuously. The regulation on auditor independence has not sufficiently address the fundamental elements that genuinely affect independence. Other reasons for corporate failures need consideration as well. There is a need for further empirical research to analyze the implications of auditor independence regulation towards the perceptions of independence. This could contribute to a better regulatory process in effort to strengthen auditor independence and simultaneously boost capital market.