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...inspiring public confidence. We use philosophical, theoretical, and professional arguments to argue that the public interest will be best served by reprioritizing professional and ethical objectives to establish reliability in fact and appearance as the cornerstone of the profession, rather than relationship-based independence in fact and appearance. This revised framework requires three foundation elements to control subjectivity in auditors' judgments and decisions: independence, integrity, and expertise. Each element is a necessary but not sufficient condition for maximizing objectivity. Objectivity, in turn, is a necessary and sufficient condition for achieving and maintaining reliability in fact and appearance.
Keywords: auditor independence; expertise; integrity; objectivity; reliability.
"The significant problems we face cannot be solved at the same level of thinking we were at when we created them."
--Albert Einstein
INTRODUCTION
Recent high-profile business and audit failures, such as WorldCom, Enron, Cendant, Sunbeam, and Waste Management, created an unprecedented crisis in the accounting profession. The crisis in part stems from the concerns about auditor independence that existed for many years. Despite recent research, education initiatives, and regulatory efforts to reduce independence risk, (1) the auditing profession continues to suffer severe public criticism. This paper develops a new perspective on auditor independence that refocuses current and future research, practice, and policy making on what stakeholders' truly seek: auditor reliability.
The new auditor reliability framework proposed here repositions independence as one of three necessary but subordinate conditions, along with integrity and expertise, for maximizing auditor objectivity and, ultimately, auditor reliability. In this context, reliability refers to a condition where stakeholders consistently find the auditor's work and opinion credible and dependable. Our view is that auditor reliability rather than auditor independence is, or should be, the profession's "cornerstone" for protecting the public interest. Recent regulatory changes, high-profile business and audit failures, ongoing financial statement restatements, and the inherent limitations of independence as a professional cornerstone create an audit environment that compromises auditors' ability to serve the public interest and maintain public confidence.
We justify our emphasis on reliability as the new professional cornerstone because the fundamental goal of the audit is to provide assurance about the reliability of an entity's financial statements as specified, for example, in the Securities and Exchange Commission's final rule on auditor independence requirements (SEC 2001) and the Independence Standards Board's Exposure Draft on independence concepts (ISB 2000). Stakeholders expect financial statements to provide a reliable representation of the financial position, results of operations, and cash flows of the entity audited. Moreover, stakeholders will judge an audit effective if they consider the auditor's opinion about the fairness of the financial statements to be reliable. Our proposed conceptual framework therefore elevates the importance of reliability and relegates independence to a more realistic subordinate role.
Our framework is further motivated by our belief that extensive ongoing public criticism of the audit profession reveals the inherent problems caused by excessive focus on auditor independence as the profession's cornerstone. The American Institute of Certified Public Accountant's Code of Professional Conduct Rule 101 (AICPA 2002a) is the basis for the profession's independence rules. A number of recent regulatory initiatives went beyond Rule 101, including the SEC's (2001) independence rules noted above and the U.S. General Accounting Office's (2002) amendment to its independence auditing standards. Educational efforts, such as the Independence Education Project's Faculty Tool Kit (2000) were also undertaken. All of these efforts that were designed to reduce independence risk continue the profession's long-standing tradition of attempting to achieve auditor independence and preserve public confidence by proscribing certain auditor-client relationships. For example, the SEC's (2002) independence rule essentially modernizes a list of unacceptable relationships. The troublesome assumption underlying this continuing proscriptive strategy is that auditors can remain free of conflicts of interest principally by avoiding or limiting certain relationships.
Our framework is based on work in several disciplines, including Mautz and Sharaf (1961) and Kinney (1999) in accounting and auditing, Benn (1998) in ethics, Nagel (1970, 1986) in philosophy, and Bazerman et al. (1997, 2002) in psychology. Exhibit 1 is a visual overview of our auditor reliability framework. It suggests that maximizing auditor reliability and financial statement reliability ultimately hinges on the auditor's ability to manage judgment and decision bias. In turn, this ability is a function of three underlying components:
* independence (relationship-based),
* expertise (technical, client, and...
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