Title

Auditor Independence: Third Party Hiring and Paying Auditors

Document Type

Article

Publication Date

9-21-2010

Abstract

Purpose – Although the Sarbanes Oxley Act (SOX) has introduced rules to avoid auditor independence impairment, there are still issues that are not sufficiently solved. The purpose of this paper is to discuss the problems of auditor independence that arise by auditors being hired and paid by the auditee, and by SOX requiring rotation of only the lead audit partner. Design/methodology/approach – The paper takes the form of a discussion paper, exploring alternatives to overcome the mentioned issues of independence. Findings – The paper presents an alternative where auditors are hired and paid by an external third party. Besides this change, it also proposes a quality control system including the extension of the CPE program. A private entity in representation of the investors (e.g. Stock exchange) and an oversight board (e.g. PCAOB) as alternatives to hire, pay and control audit quality are discussed. Practical implications – This paper has implications for regulators, since it presents a new alternative for hiring and paying auditors that requires an active involvement of an independent third party. It also has implications for professional bodies by increasing their participation in monitoring and training its members. Originality/value – The paper presents an original alternative for avoiding independence issues derived by auditors being hired and paid by the auditee, and opens a discussion in a new solution to an old problem.

DOI

10.1108/14502191011080827

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