Statutory Auditors’ Independence in India: An Empirical Analysis from the Stakeholders’ Interest Perspective

Abstract

Executive Summary A business projects its financial performance through its financial statements. An audited financial statement is considered to be genuine and dependable by the stakeholders of the business. Therefore, statutory auditors should be self-regulating so that they can perform their professional role without being influenced by the management. The current regulatory framework for statutory auditors defines independence requirement for a statutory auditor in a professional engagement, points out circumstances that may create threats to independence and also proposes some measures to safeguard the same. However, in recent corporate accounting scandals, company’s failure led to devastating cost to the stakeholders, and audit failure was identified to be one of the causes behind them. Following investigations also sensed possible impairment of statutory auditors’ independence in those scams. In this backdrop, based on the existing literature on this subject, this article identifies variables influencing positively or negatively statutory auditors’ independence in their professional engagement. Opinions of statutory auditors and select other groups of respondents were collected. Most of the respondent groups believe that statutory auditors fail to detect irregularities in financial books due to their lack of independence and professional scepticism as was observed in this study. Several legal case decisions also support this finding. A long association between a statutory auditor and a client is one of the major reasons behind statutory auditors’ lack of independence. Opinions of respondents supported by applicable legal case decisions also proved that lax disciplinary measures and inadequate inspection framework caused audit failures in many recent cases. This study also analyses a significant difference of opinion among respondent groups and identifies the groups having a similar line of thought for each variable. One-way analysis of variance (ANOVA) and Tukey’s honestly significant difference (HSD) test were conducted, respectively, for these purposes. The result shows that significant differences exist among the respondent groups for most of the variables. Moreover, corporate executives have shown a significant difference of opinion from professional accountants, especially on the issue of statutory auditors’ negligence. While corporate executives believe statutory auditors are negligent in their duty, professional accountants oppose their views. Applicable legal case decisions also support such findings. Investors have shown similar views in line with academicians and students.