Auditor Independence and Audit Risk in the UK: A Reconceptualisation

It is recognised that the fact of auditor independence is generally unobservable and therefore it is only normally when cases of audit failure arise that evidence of lack of independence in fact emerges. However, in advance of investigators’ judgments on the conduct of the audit, the Enron affair and subsequent collapse of Andersen has emphasised the significance of confidence in independence in appearance. The UK regulatory framework for auditor independence (1997) identifies both the threats to independence and the safeguards which should control the threats. This study is based on six case studies of interactions involving significant accounting issues between audit engagement partners and finance directors in UK listed companies, published in our recent book Behind Closed Doors: What Company Audit is Really About (2001). In this paper we analyse each interaction and identify the threats and safeguards to auditor independence in fact which are relevant to each outcome. Poor outcomes are found to arise where the safeguards are insufficient defence against the threats. Additional threats to those identified in the UK framework emerge from the cases, particularly an urgency threat, and a loss of face threat. Other important examples are found of familiarity threats and self-review threats. Management motivation is found to be a key driver of pressure on an auditor. Threats to independence which arise within the audit firms themselves are not recognised in the current audit risk model, which only addresses the detection of issues and not their resolution. An extended risk model is suggested. We suggest changes to the UK framework and the IFAC Code of Ethics for professional Accountants (2001). Threats to independence (whether in appearance or fact), which are already the subject of prohibitions, should be treated separately from continuing threats.