Friday, October 9, 2020

Auditor Independence

Editor's Note: The Public Interest Section of the American Accounting Association is pleased to publish the following blog post by Francine McKenna, independent journalist at The Dig, a newsletter, an educator and a researcher. Please contact lawrence.chui@stthomas.edu with questions, comments, or suggestions about our blog, or to express interest in our organization. Disclaimer: When you read the comments of our columnists, please keep in mind that they only speak for themselves. They are not expressing the positions of the AAA or of any other party.


Auditor independence issues have been in the news in recent years in the US and in the UK. Investors wonder why they should trust auditors’ opinions when the auditors consistently miss corporate fraud, conflicts of interest and other malfeasance while also being accused or suspected of their own conflicts of interest. Which side are the Big 4 audit firms, in particular, on these days — the shareholder and capital markets or their paying clients? Public Interest and Audit Section member Francine McKenna, C.P.A. is an adjunct professor at American University's Kogod School of Business where she teaches “The Manager in the International Economy" in AU’s online MBA Program. In June 2020, she presented the paper, “SEC Proposals to ‘Modernize’ Auditor Independence Rules: Doublespeak for Capitulating to the Big 4's Dominance?” at the inaugural AAA SPARK conference for the Public Interest Section. You can find her presentation page here. The SPARK paper was based on a four-part series, published in January 2020, in her newsletter, The Dig. We’ll republish the original four-part series on the blog starting this month. 

The series updates our knowledge of new and old auditor independence violations, in particular by the Big 4 global audit firms since the adoption of updated auditor independence rules in 2001 and after additional restrictions were placed on audit firms by the Sarbanes-Oxley Act of 2002. She highlights the violations that were prosecuted by the SEC and many that weren’t. The paper also explained why the Big audit firms, in particular, have been lobbying to relax auditor independence rules, why the SEC is agreeing with those requests and the PCAOB is following the SEC’s lead.  Finally, the paper discusses the implications of this “modernization” effort for the capital markets and the auditor’s public duty.

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