An Examination of the Mechanism and Legal Regulation Assuring Audit Independent
Posted Friday, March 3, 2017

Audit independence is a matter of degree. However, given its cornerstone role of the financial market, our modern capitalist system not only needs the appearance of audit independence, but also needs it in reality. Under the present business circumstances, specifically after Enron and many other catastrophic audit failures, the market critically needs audit independence to construct a sustainable and prosperous capitalist market system. This essay compares the pre- and post-SOX mechanism and the legal requirements assuring audit independence. In particular, the current legal regulation is examined from the economic perspective. The results suggest that the current post-SOX legal regulations cannot satisfy both the effectiveness test and the fairness test of public policy. That means the current regulations neither effectively discourage audit independence violations nor do they avoid negative externalities or encourage internalize the foreseeable externalities. Improvements in the post-SOX era only elevate the appearance of audit independence, but regrettably do not create independence in reality. This essay concludes that the accounting industry’s business model, created by federal securities laws, and its inherent conflict of interest needs to be corrected. Without seriously addressing these key points, the real audit independence will never come true.