CPAs’ Perceptions of Auditor Independence: An Analysis of Views Before and After the Collapse of Enron

Illinois State University, College of Business, Department of Accounting
November 2002

AUTHOR:
Deborah L. Lindberg, D.B.A.
Frank D. Beck, Ph.D.

ABSTRACT:

Auditor independence helps to ensure quality audits and contributes to financial statement users’ reliance on the financial reporting process, thus increasing capital market efficiency (McGrath, Siegel, Dunfee, Glazer & Jaenicke 2001). Hence, auditor independence is often referred to as the cornerstone of the auditing profession, since it is the foundation for the public’s trust in the attest function (Caswell & Allen 2001; The Economist February 9, 2002). By contrast, Byrnes, McNamee, Brady, Lavelle & Palmeri (2002) and many others (e.g., Greising 2002; The Economist January 19, 2002; The Economist February 9, 2002) have stated that the collapse of Enron has had a very negative impact on the perception of auditor independence. However, we do not need to rely on anecdotal evidence to determine the effect of the Enron bankruptcy on perceptions of auditor independence – prior to Enron declaring bankruptcy, we had developed an extensive survey instrument on auditor independence that was sent to 1,500 CPAs in October 2001; after Enron declared bankruptcy, the survey was sent to another 1,500 CPAs drawn from the same database, asking their views on auditor independence. Consistent with our predictions, the results of our research indicate that CPAs’ perceptions of the effects of non-audit services on auditor independence are more negative after the bankruptcy of Enron, compared to CPAs’ perceptions of such services on auditor independence before the bankruptcy of Enron. In addition, CPAs hold a more conservative view of whether a material transaction or event detrimentally affects auditor independence after the bankruptcy of Enron, compared to before Enron declared bankruptcy. Further, our findings suggest that auditors believe non-audit services and other issues that threaten auditor independence detrimentally affect the public’s perception of independence to a greater extent than they adversely influence actual independence.

Key Words: Auditors; CPAs, Independence “In Fact”; Independence “In Appearance”; Perceptions of Independence; Enron.

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