Case for continuation of mandatory independent audits for publicly held companies;

              8
The Case for Continuation of Mandatory Independent Audits For Publicly Held Companies
John C. Burton
Securities and Exchange Commission*
When I was asked to speak on this topic I will have to admit that I did not initially view it as a hot one. Nevertheless, it did seem desirable to look once again at the somewhat strange phenomenon called an audit by an inde­pendent
public accountant to see whether or not the conventional wisdom which asserts its necessity is justified.
How Much Independence?
The first question to be considered is whether or not, in fact, we want totally independent audits. Here I think the answer is probably no. Independence does not necessarily lead to assurance, and absolute independence, which would require elimination of all dependence on communication with clients, would be bad news indeed. The ultimate independent audit would be where the auditor arrives on the scene, is handed the financial statements and the books, and talks with no one within the company. I think we could agree that such an audit would very likely be a rather bad one since an audit depends on candid communication between auditor and client in order for the auditor to develop the necessary thorough knowledge of the company and its business which he must combine with a knowledge of the accounting measurement model.
What we do want, therefore, instead of absolute independence is a dis­passionate
unbiased professional review of financial statements. In addition, we expect auditors to be proficient in the measurement and communication of financial information, and to assist their clients as necessary to insure adequate reporting to the public.
Parties at Interest
As indicated above, an audit is a rather strange creature and not at all the way in which it is perceived by most outsiders. In an overwhelming majority of cases, the audit is essentially a cooperative effort because the interests of management, the auditor, and the public coincide. In these engagements the
*The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author's colleagues on the staff of the Commission.
117