Policy and Research Implications of Evolving Independence Rules for Public Company Auditors

Abstract

SYNOPSIS: We synthesize the results of existing auditor independence research and provide commentary on the implications for two primary audiences: policy makers who consider research findings in formulating independence requirements for public company auditors and academics whose research can help inform policy makers. Our review of the independence literature suggests that extant research, though limited in scope, does not provide strong evidence that the prohibitions and requirements imbedded in the current independence rules for public company auditors are strongly correlated with independence in fact. However, some prohibitions and requirements do appear to improve perceived independence—at least in the pre-SOX era. In response, we highlight a number of issues that policy makers might consider in trying to achieve a balance between cost and benefit. Further, because policy formulation benefits from research, we highlight numerous opportunities for future research that could drive policy formulation, and benefit all stakeholders.