THE ISSUE OF INDEPENDENCE
A public company shareowner could understandably be
concerned about the investor protection that
should be directly related to the concept of audit independence. It is difficult to accept and understand how
a CPA Firm can be considered truly independent in either appearance or reality
when that CPA Firm is hired/paid by the client. This situation is like a
baseball team hiring and paying for their own umpires.
Having the audit committee handle the
hiring/paying for the auditor is like having the audit committee (board) of a
baseball team do the same for the umpires for their team. The independent board
(audit committee) members are key members of the ultimate management
(oversight/monitoring) of the organization, and are responsible for the
success, controls and effectiveness of that organization. Would they tend to
want auditors who would passively bless their results, or an auditor who would
actively pursue excellence, including the consideration of the audit committee's
performance?
In our opinion, the CPA Firm that is hired/paid by the client is an
"external", not an "independent" auditor, and should be so
designated, together with an explanation for the distinction, in an Annual
Report.
There is an evident risk in the current practice of the client hiring/paying
the auditor. An auditor could face a court challenge of not being independent
in either fact or appearance. This type of occurrence could force the matter of
finally addressing and resolving the lack of independence of an “independent”
auditor.
The independence of public company audits and the
protection of the investments by shareowners can be dramatically improved by
not allowing these companies to hire their own auditors. Public companies could
be assessed amounts that will fund audits by a governing authority - with the
hiring, payment and control of the auditing firm
being accomplished by that authority.