Working Papers in Accounting and Finance UK Investors’ Perceptions of Auditor Independence

The purpose of an auditor’s role in society is to validate the truthfulness of financial statements. In order to perform their role, it is essential that auditors are independent of the client company and are not seen to have any motive for none disclosure of misleading information (Lavin, 1977:237). If owners of organisations doubt the auditor’s independence, financial statements will lack credibility. However, despite independence lying at the heart of the auditing profession, independence concerns can be traced back to the 19 Century. During this time the accounting profession has found it difficult to produce a system of standards which eliminate conflicts of interest and protect auditors’ independent mental attitude. In the UK, auditor independence concerns were heightened as a result of the scandals and corporate collapses which took place in the 1980s and 1990s (e.g. Maxwell, BCCI, Polly Peck, Barings Bank and Lloyd’s of London). Since these scandals, much has changed in the ‘environment within which auditing services are bought and sold’ (Beattie and Fearnley, 1994:301), including the concentration of the audit market from the Big Eight auditors to the Big Four auditors and yet another, more recent, wave of high profile accounting scandals (e.g. Enron and WorldCom). Such changes have provoked new audit regulations. For example the Sarbanes-Oxley Act (2002) in the USA and the Auditing Practices Board’s (2004) ‘Ethical Standards for Auditors’ in the UK. This questionnaire-based study conducted in 2005 focuses specifically upon how investors perceive some of the main auditor-client relationships that may have contributed to the collapse of Enron: the joint provision of audit and non-audit services, an audit firm’s economic dependence upon a client and long relationships between auditors and clients, in order to determine whether, in the current climate, owners still have faith in the role of the auditor. The results suggest that, similar to previous UK perceptions based work (e.g. Firth 1980, 1981), economic dependence and the provision of non-audit services are perceived as greater threats to auditor independence than a long auditor-client relationship. In general, private investors and those without accounting qualifications displayed the most concern about auditor independence issues. However, all investors perceived the current ‘Ethical Standards for Auditors’ as sufficient safeguards for their investments and indicated that the introduction of further regulation was not necessary.