A framework for auditor independence.

Author:McGrath, Susan
Position:Independence Standards Board exposure draft

In November the Independence Standards Board (ISB) issued an exposure draft (ED) of a conceptual framework for auditor independence containing the concepts and basic principles that will guide the board in its standard setting. The framework defines auditor independence as "freedom from those factors that compromise, or can reasonably be expected to compromise, an auditor's ability to make unbiased audit decisions."

It will help practitioners, investors, regulators and other standard setters understand the significance of auditor independence and provide a common language so that those involved in the ongoing independence debate can contribute to the development of ISB standards. The framework does not provide easy answers to specific independence questions but it supplies a structure and methodology for analyzing issues. This article describes the framework and some of the reasoning behind it.


The need for a framework arose from the jumble of confusing independence rules and regulations--many in the form of interpretations issued in response to specific independence questions--that applied to public companies and their auditors. The guidance in those interpretations, issued over the years and under changing circumstances, sometimes conflicted and lacked theoretical consistency. Auditors also faced challenges in applying such guidance if the facts and circumstances of an auditor's relationship with his or her audit client did not match those in the interpretation. While the independence regulations helped to ensure quality audits and contributed to the high level of financial reporting we enjoy in the United States, in today's increasingly complex business environment the ISB believes that some revisions are in order. The recent SEC rule on auditor independence (see "SEC Approves Rules on Auditor Independence," page 8) updates many of the independence rules and regulations, but numerous issues remain.

The framework is the product of an open process. A task force of academics, lawyers, audit committee members, regulators, auditors and others helped identify the issues and reviewed drafts for clarity and completeness. The group included representatives from international standard setters so board standards could be harmonized where possible with those used in other countries. A board oversight task force provided direction. In addition, many individuals and groups provided comments on the discussion memorandum, which the ISB issued earlier to alert them to a possible ED and to solicit opinions. The board hopes the ED will receive the same level of participation.


The framework defines, and identifies the goal of, auditor independence. The model for standard setters is based on three key steps:

* Identify threats to the auditor's independence and analyze their significance.

* Evaluate the effectiveness of potential safeguards, including restrictions.

* Determine an acceptable level of independence risk--the risk that the auditor's independence will be compromised.

Under the model, the ISB and other standard setters are to analyze the costs and benefits of regulations and consider the views of investors, other users of financial information and additional interested parties.

The definition of independence does not require the auditor to be completely free of all the factors that affect the ability to make unbiased audit...

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