How independent are public audit oversight systems? An interdisciplinary approach to accounting regulation. (forthcoming)

The independence of audit oversight systems is the most essential prerequisite for restoring public confidence in audits after the past accounting scandals and financial crisis. Thus, over the last years, the European Union passed various provisions to strengthen the independence of European oversight systems. However, a systematic and encompassing comparison of the reform outcomes across the European Member States is still missing. This study is the first that provides insights into the question as to how independent the “independent” audit oversight boards are. Their independence is measured both in terms of their institutional composition (e.g. appointment procedures of the board members) and regulatory competencies (e.g. the way audit firms are inspected). The results are visualized by a Partial Order Scalogram Analysis (POSAC), which allows conclusions about the similarities of various countries and their relative levels of independence. Both measurements are then equally combined into one value of material independence and to a rank order of all European oversight systems and the U.S. PCAOB is set up. The study shows that, while the oversight of financial reporting is conducted by securities regulators in most European Member States, the field of auditing still has a long way to go to achieve regulatory harmonization. The analysis reveals considerable diversity with regard to the way the various European oversight systems are organized and operate. While countries such as Luxembourg, Italy, Latvia and the UK possess relatively independent oversight systems, the systems of Ireland, Portugal and Slovakia show low levels of independence. Since the different systems are strongly interrelated with the accounting profession, I point out that these countries have focused on creating “independent” oversight entities rather than on implementing truly independent regulation. The paper also questions the role of the PCAOB as regulatory “benchmark”: Although the PCAOB shows the most independent values in terms of regulatory competencies, the institutional independence of the PCAOB from the accounting profession seems to be less strong than the literature suggests.