Auditor Independence

© 1999 American Accounting Association

Accounting Horizons

Vol. 13 No. 1

March 1999

pp. 69–75

COMMENTARY

William R. Kinney, Jr.

William R. Kinney, Jr. is a Professor at the University of Texas at

Austin.

Auditor Independence:

A Burdensome Constraint

or Core Value?

The U.S. Securities and Exchange Commission (SEC) delegates to private standards-setting bodies much of its accounting-related rule-making authority under the

securities acts. It has long delegated, while maintaining oversight, authority to set generally accepted accounting principles (GAAP) to the Financial Accounting Standards

Board, and authority to regulate generally accepted auditing standards (GAAS) to the

AICPA’s Auditing Standards Board. Recently, through Financial Reporting Release

No. 50 (issued February 18, 1998), it delegated authority to define auditor independence to the Independence Standards Board (ISB).

Accounting and auditing standards have been the subject of much scholarly research,

but independence standards are relatively unexplored. All three are essential to determining the value of our system of audited financial reporting for investor protection, as well as

its value for corporate governance, and for facilitating capital formation.

This commentary explores two views of independence, and how the views might be

applied by practitioners, regulated by regulators, and studied by scholars. The views

are based on my experience with the accounting profession as a member of the Auditing

Standards Board and the Special Committee on Assurance Services (the Elliott Committee), as well as teaching auditing for M.B.A.s and accounting majors for more than

25 years.

TWO VIEWS OF AUDITOR INDEPENDENCE

While not defined by the securities acts, “independent” accountants are to be hired

by registrant management to certify compliance of management’s financial statement

assertions with GAAP. The independent accountant (auditor) is to conduct an examination that applies...