Auditor's Independence: When the Client Becomes too Familiar

Abstract

This thesis investigates whether there is a propagation of situations, where the relation with the client has have an effect on the auditor’s audit opinion due to the value of the relation. Furthermore, the thesis examines whether an ideal solution is in place, provided that a problem is concluded. There are several entrenchments in place regarding for auditors, what they have to do and what is prohibited, in order to ensure auditor’s independency, when performing an audit. But only for companies which are categorized as Public Interest Entity or PIE. The PIE companies have defense work regarding auditor’s independency such as a limited serving time, and an upper level of how much the auditor is allowed to earn from one client, based on the total fee from all services delivered. For the remaining companies, placed in the accounting class A to Big C there are no legal entrenchments in line to ensure auditor’s entrenchments, besides the always applicable rules regarding independency. The examination of the thesis is limited to Danish non-PIE companies that receives and audit opinion, due to the limited resources of this paper. Initially the thesis describes the legal demands for auditor’s independency when providing an audit opinion. The examination suggest that today’s legislation and framework for auditors does not provide a clear definition of what independency is but rather describes a way to act to ensure independency. Furthermore, the legislation gives a rather large room for auditor to make individual interpretation of when the law has been breach. This is arguably a big burden to place on the shoulders of the auditors. The legal demands for the auditor’s independency when providing an audit opinion was concluded to be that auditor needs to be independent in two ways, 1) in mind and 2) in appearance throughout the times where the auditor serves the company and throughout the period for which the auditor opinion is declared upon. The first part of the analysis has investigated whether there occurs a propagation of situations where the client relationship effects the auditors audit opinion. The analysis was based on data from a questionnaire and interviews with a total of 127 respondents. Based on the analysis there was clear indication that a problem is existing. The second part of the analysis investigated whether a possible solution could be found. Based on the data available for the time being, it was not possible to determine whether some of the suggested solutions would be possible.