A theoretical approach to auditor independence and audit quality

Abstract

Auditor independence is gaining a lot of attention from researchers, regulators and public observers. This has been described to have a major significant impact on audit quality. Several reasons have been given for the crucial importance of auditor independence to audit quality and this has formed a longstanding debate among academics, regulators and market observers on how best to protect auditors and mitigate concerns from users of the financial report (Tepalagul & Lin, 2015). The accounting scandals of publicly listed entities ignited the scrutiny and criticism by market regulators and independent observers on the credibility of audit reports, and also industry experts‟ reactions to Enron scandal prompted the passage of Sarbanes-Oxley (SOX) Act of 2002 (Dattin, 2017; Tepalagul & Lin, 2015; Velte & Loy, 2018). Most important, the earliest research to investigate the impact of auditor independence on audit quality was greatly attributed to DeAngelo (1981). According to DeAngelo (1981), audit quality greatly depends on auditor independence and has been defined as the probability that the auditor will uncover and report any breach in the accounting system. The concern to auditor independence is highly imperative, because of its magnitude to financial credibility and this has been the reason why market regulators are more concern about the independence of auditor to provide high audit quality that meets the international standard and that can be relied upon by the users of financial statements (Dattin, 2017; Tepalagul & Lin, 2015; Velte & Loy, 2018). The accounting fraud and the collapse of major companies such as Enron, WorldCom, Satyam, Cadbury in Nigeria; Olympus in Japan dent serious blow to audit profession and the aftermath of global financial crisis provide another avenue for market regulators and practitioners in questioning the independence of auditor (Wood & Small, 2019; Velte Abstract