Research on Auditor Independence Requirements

The auditing profession exists as a result of information risk and financial statement credibility. As the stakeholders need to understand an entity’s conditions when conducting business activities, but are not capable of understanding complex financial information or do not have full confidence in financial statements prepared by the entity, an auditor, representing a professional and objective third party, is engaged to issue an opinion on the fairness of financial statements. Therefore stakeholders expect that the auditors will be independent of the auditees. It has always been the goal of the profession for the auditors to provide more non-audit services to auditees and protect the economic interests of audit firms while ensuring that auditor independence is in fact maintained and is recognized by stakeholders.

However, with society demanding a higher level of auditor independence, the United States implemented a system of public regulation under the Sarbanes-Oxley Act, significantly restricting the scope of non-audit services that auditors may provide to the audit client.

This research paper investigates the efforts undertaken, the positive benefits received and the difficulties encountered by Big-4 accounting firms in order to comply with global firm policies with respect to independence rules and requirements. Based on this investigation, Taiwan’s governing authority may consider the following recommendations if it is to adopt the spirit of Sarbanes-Oxley Act requirements and place restrictions on the non-audit services that auditors may provide:

1.Consider narrowing the scope of prohibited services as defined in the Sarbanes-Oxley Act, as appropriate;
2.Consider materiality in the evaluation of certain prohibited non-audit services;
3.Consider modifying restrictions on corporate group clients, as appropriate;
4.To enhance compliance, consider modifying policy on auditor partner rotation requirements, as appropriate; and
5.Request audit firms to establish quality control policies and procedures in accordance with ISQC1 and monitor compliance with such policies.