Research in Auditing:

Auditor Independence
Damai Nasution, Dr. Sc. (Acc.),
Ak. CA.

Introduction
What is the raison dtre of the
audit market?
Effective & efficient allocation of
resources

Human capital

Stakeholders
profession

Auditing

Audit demand

Audit supply

Audit market

Introduction
What is the auditing research?
Why is it interesting?
History of auditing
The important role of auditing
Textbook:
Improve the reliability of the financial statements
Contribute to the effectiveness of the capital markets

Research literature:
The information hypothesis
The monitoring hypothesis
The insurance hypothesis

Perspectives employed

Introduction
Approaches applied
Topics/issues
Top journals dedicated
International forums.

Current Issues
Issues:
Public oversight
The most efficient and effective mechanism of public oversight
Impact of a such mechanism on auditors behaviour as well as economics
consequences

Audit market concentration

How the concentration affects to clients choices, audit pricing, auditors
behaviour, etc.

Auditor independence
Factors that can jeopardise and protect auditor independence

Auditor tenure
The consequences of auditor tenure on auditor independence, audit quality,
audit fees

Audit quality

Factors that affect audit quality

The economic consequences of audit quality
Chickens or eggs?
Instruments to measure audit quality
The role of audit committee

Audit firm ownership structure

Current Issues
Audit firm operating structures
Audit firm governance
audit firm governance, auditor behavior and role of transparency

Audit and NAS fees

The impact of economic dependence on auditor independence

Auditing expectation
The public expectation of audit roles

Audit risk assessment

Factors considered by auditor
Audit risk assessment and audit quality

Audit regulation
Auditor liability
Industry specialisation
Auditor reputation
Big 4 vs. Non- Big 4 (product differentiation
hypothesis/reputation rationale hypothesis)

Current Issues
Industry specialisation:
Impacts on audit quality
Audit fees

Auditor reputation
Impacts on audit quality
Auditor behaviour

Big 4 vs. Non- Big 4 (product differentiation

hypothesis/reputation rationale hypothesis)
Auditor judgment & decision making
Corporate governance and auditing
Litigation risk and auditor behaviour

Introduction
Trend in the analysis:
Treating the Big-4 not in a homogeneous
way (look at Figure 1)
Considering the political dimension/legal
regime
Testing the public companies
phenomena on private companies
Auditor industry specialisation
EU and China phenomena

Figure 1: Treatment of Big4

Big4

Individual Big4 firm

Big4 city office

Big4 city office

partner

Individual auditor

Research in Auditing: Auditor

Independence
Audit quality and auditor
independence
The audit quality is a joint probability
that an auditor will both (a) discover
a breach in the client's accounting
system, and (b) report the breach
(DeAngelo, 1981).

Audit Quality

Research in Auditing: Auditor

Independence
A cornerstone of the auditing
profession.
The profession promotes it to define,
defend, and extend the profession
(Sikka & Willmott, 1995).
What is auditor independence?

Research in Auditing: Auditor

Independence
Independence in mind is defined as the state of
mind that permits the expression of a conclusion
without being affected by influences that
compromise professional judgment, thereby
allowing an individual to act with integrity and
exercise objectivity and professional scepticism
(IFACs).
Independence in appearance is defined as the
avoidance of facts and circumstances that are so
significant that a reasonable and informed third
party would be likely to conclude, weighing all the
specific facts and circumstances, that a firms, or a
member of the audit teams, integrity, objectivity or
professional scepticism has been compromised
(IFACs).

Research in Auditing: Auditor

Independence
Independence in fact as a characteristic of
the individual auditor in which auditors will
be unbiased when conducting the auditing
assignment, from the planning phase through
to the reporting phase (Barlett, 1991).
Independence in appearance as a set of
constraints on the behaviour of auditors that
creates the appearance of not having a
vested interest in the auditing outcome
(Barlett, 1991).

Research in Auditing: Auditor

Independence
Independence is the ability of auditors to
resist management pressure (Knapp, 1985).
Independence is defined as the [ability] to
act with integrity and objectivity in
performing the audit (McKinley, Pany, and
Reckners (1985).
Bartlett (1993) defines independence as an
unbiased mental attitude in making decisions
about audit work and financial reporting.
Younkins (1996) defines independence as
freedom from the control of those whose
records are being reviewed (p. 1).

Research in Auditing: Auditor

Independence

Research in Auditing: Auditor

Independence

What is auditor
independence?