I was reading the December 2017 issue of The CPA Journal, and saw letters (“Continuing the Discussion on the Meaning of Fiduciary,” Vincent J. Love and Samuel P. Gunther, http://bit.ly/2DLolX0 and http://bit.ly/2nt1EMb) that opened old wounds and revealed, in the clearest terms, how hypocritical and tone-deaf we are as a profession. One of the cornerstones of the attest function is the concept of independence. When we teach, discuss, and live independence, we do so in two realms, actual and apparent. While these letters originally stemmed from an article that considered whether auditors were fiduciaries, the concept of independence played a central role; indeed, one of the follow-up letters was entitled “Auditors Are Fiduciaries, but in No Way Can We Be Considered Independent” (Richard H. Kravitz, October 2017, http://bit.ly/2E2H2oo). In his letter, Kravitz referenced an article by Chris Gaetano (“Eroding Auditor Independence a Concern for PCAOB Member,” The Trusted Professional, January 26, 2017) and repeats the quote of PCAOB member Steven B. Harris: “The independent auditor assumes a public responsibility transcending any employment relationship with the client.” In other words, Harris considers the auditor–client relationship to be an employment relationship in the same sentence he calls the auditor “independent.”
My own article “Does Being the Auditor Impair Independence?” appeared in The CPA Journal quite some time ago (June 2005, http://bit.ly/2EqeHGD), but I was not the first to discuss the issue (nor the last). Love called it “the age-old independence issue related to the client’s paying the fee for the audit.” Gunther states that when an auditor asserts independence, “the auditor obviously recognizes the ‘critical role of independence.’” He also states that “auditors who fail to satisfy the independence requirement are subject to lawsuits.” Throughout all three letters, the term “independent auditor” is used liberally and often. So my question is, what has the profession done regarding this “age-old” issue?
If the auditor is not independent, of what good is his opinion? If it is of no good, what value does the attest function possess? If the attest function has no value, what is the basis for the need for financial statements? I believe that the financial statements are pretty important for a variety of users and used in a myriad of ways in a significant number of industries and environments.
Does receiving a fee from the entity being audited, which is also the client, impair independence? It seems to me that paying the fee represents a financial arrangement. In discussing one solution that was offered to solve this issue—having a quasi-government entity assign auditors to clients and also pay the audit fee—Love calls it “unrealistic and unworkable.” While he also states that the issue is too important to ignore, that is exactly what we have been doing.
It is also suggested that independence is a continuum, that we can improve independence without it meaning we are not independent. Perhaps the inference is that we are independent enough, but should strive to be even more independent. I consider independence an absolute—a bright line that we should hold inviolate. I consider the auditor–client relationship to impair independence, and the inability to identify a solution stems from the comfort that has evolved from working within this arrangement for so long.
If we settle on the idea that this can’t be resolved through reasonable and pragmatic means, how about this suggestion for lighting a fire under the profession: each audit opinion should contain the following language:
“We were paid $X by [insert company name] to render this opinion. Under the definition of independence this could reasonably be inferred to impair our objectivity.”
While I doubt many will support the inclusion of this in the auditor’s opinion, it is the reality whether we state it or not.