® Copyright by HANS JAY DYKXHOORN 1978 ii AN EMPIRICAL INVESTIGATION OF WIRTSCHAFTSPROFER INDEPENDENCE BY Hans Jay Dykxhoorn A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Accounting and Financial Administration 1978 (ryfiflt k.) 1“.» -Lqi-C‘) C ABSTRACT AN EMPIRICAL INVESTIGATION OF WIRTSCHAFTSPRUFER INDEPENDENCE By Hans Jay Dykxhoorn German auditors (Wirtschaftsprfifer) have been severely criticized in the financial press and the German accounting literature. Wirtschaftsprfifer (WPs) have been accused of lacking independence on a number of occasions. This study investigates empirically the perceptions of WPs independence by German auditors and by users of financial statements audited by WPs. The controversy surrounding the independence status of the German accounting pro- fession suggests that there may be a considerable lack of consensus among and between WPs and users of audited financial statements concerning the circumstances which would render the auditors not independent in appearance from their audit clients. In conducting the study, a random sample of WPs was selected to represent the German accounting profession. Two distinct financial statement user groups representing the investors' and creditors' point of view were identified as bank directors of investment departments (LWPs) and bank directors of loan departments Hans Jay Dykxhoorn (LKRs). A non-random sample of the larger banking institutions located in the 12 largest cities in Germany was selected and questionnaires (written in German) were mailed to each of the banks, one questionnaire to the director of the investment depart- ment and one to the director of the loan department of the sel- ected banks, as well as to the random sample of Wirtschaftsprufer. Branch banks were included for a few of the very large banks only. The questionnaire contained a number of separate auditor- client relationships for which the sample subjects were asked whether they considered the auditors involved to be independent or not independent from their audit client. The types of auditor- client relationships investigated included the following categories: (a) Financial interest (direct and indirect) (b) Bookkeeping and EDP services (c) Family relationships (d) Occupations with conflicting interest (e) Business and other similar relationships LWPs and LKRs were also asked to indicate on a five-point Likert- type scale the extent to which each of the situations would affect their financial decisions, a "1" representing a strongly negative influence and a "5" representing a strongly positive effect on their financial decisions. The results of this study indicate that for most of the auditor-client relationships investigated there were no diff— erences in the majority responses between the three experimental groups. In only 3 out of a total of 27 auditor-client relationships Hans Jay Dykxhoorn did the majority response of WPs differ from the majority response of both financial statement user groups. LWPs and LKRs were of divided opinion on 4 auditor-client relationships which implies that WPs agreed with one user group but not with the other. The hypothesis tests of whether there is a consensus within each of the three experimental groups indicated that for a sig- nificant number of situations the null hypothesis of no consensus could not be rejected at a confidence level of 95 percent. Con- sensus was defined as a statistically significant majority of opinion using the Binomial Test. The WP responses showed no consensus in 9 out of 27 situations. The number of auditor-client relation- ships on which LWPs and LKRs could not reach a consensus were 11 and 7, respectively. Of the 9 situations on which WPs could not reach a consensus concerning the auditors independence status none are specifically disallowed by currently effective regulations covering the ethical conduct of Wirtschaftsprfifer. The results of testing the effect of financial statement users' perceptions of auditors' independence on their financial decisions revealed that for most of the auditor-client relationships investigated there was a statistically significant effect at a confidence level of 95 percent. For those few situations in inhich no effect was determined, the results could have been due enmtirely to chance since multiple t-Tests were employed. Based on this study's findings the following conclusions can be made: (a) perceptions of independence by third parties appear (b) Hans Jay Dykxhoorn to be a factor in the decision model of audited financial statement users for financial decisions, and more specific guidelines are needed for WPs to better ensure their independence. Guidelines seem to be especially needed for those types of situations in whichluiconsensus was reached within any of the three experimental groups and those situations in which WPs disagreed with one or both of the financial statement user groups. ZU MEINEN ELTERN iii ACKNOWLEDGMENTS I would like to thank my committee members, professors Gyan Chandra, Gardner Jones, William Schmidt, and Harold Sollenberger for their continued guidance on this project, as well as Arthur Young and Company, and the Department of Accounting and Financial Administration at Michigan State University for financial support during the final stages of my doctoral program. Several individuals provided assistance at various stages of the research. The suggestions of Mr. Rudolf Niehus, partner of Deloitte, Haskins 8 Sells, Germany, improved the quality of this research immeasurably. Ms. Lieselotte Ritter assisted in the difficult task of translating the questionnaires into German. Mr. Ingo Wielgos, Ms. Gustchen Wielgos, and Mr. Friedhelm Wentrot all aided in the wording of the cover letters. Ms. Linda Catey typed numerous preliminary drafts as well as the final copy of the dissertation. Ms. Kathleen Sinning's constructive criticism and editoral assistance greatly improved the readability of this manuscript. I owe a great debt to all of them. Finally, I wish to express my appreciation to the Institut der Wirtschaftsprfifer for the use of their Library and the competent and courteous assistance of their Library staff. iv Chapter 1 TABLE OF CONTENTS INTRODUCTION . THE Research Objective . Research Hypotheses . . Importance of the Study . Contribution to German Accounting Practice . Contribution to U. S. Accounting Practice . Contribution to International Accounting Practice . Summary and Outline of Research Chapter One--Footnotes . GERMAN ACCOUNTING PROFESSION . Organization and Structure of the German Accounting Profession . . . . Relationship between the Wirtschaftspru- ferkammer and the Institut der Wirtschaftsprufer . . . . Size of the WP Profession . . . . Characteristics of the Profession "Big Eight" International Accounting Firms . . . . . . . . Professional Qualifications Purpose of the German Auditor's Opinion (Bestatigungsvermerk). . . . . . Development and Sources of Accounting and Auditing Principles and Standards . Professional Duties and Responsibilitites of Wirtschaftsprufer . . . The Wirtschaftspruferordnung (WPO). The Directives (Richtlinien) of the Wirtschaftsprfiferkammer (WPK) The Stockcorporation Law . Summary Remarks . . . . . . . . Chapter Two--Footnotes . Page OCH-h 10 12 14 14 15 17 18 19 20 21 22 24 25 25 27 30 32 Chapter Page 3 THE INDEPENDENCE ISSUE IN GERMANY AND THE CONCEPT OF AUDITORS' INDEPENDENCE . . . . . . . . . . . . 37 Introduction . . . . . . . . . 37 Discussion of the Issues Raised and Solutions Suggested in the German Accounting Liter- ature Concerning WP Independence . . . . 39 Auditor-Client Relationships that May Impair Auditors' Independence in Appearance . . . . 42 Criticism of the WP Profession Independence Status Raised in the German Accounting Literature . . . . . . . . . 44 Solutions Suggested in the German Accounting Literature . . . . . 50 Proposals Involving Structural Changes in the WP Profession . . . SO Proposals Not Involving Structural Changes in the WP Profession . . . . . . . . . 53 Broadening Auditors' Liability . . . . . . 54 Incompatible Activities . . . . 55 Extension of the Casuistry and Related Suggestions . . . . . . . . . . . . . . . 57 Implications . . . . . . 59 Conceptual Foundation of the Concept of Total Independence . . . . . . . . . . . . . 61 Independence in Fact . . . . . . . . . . . . . 62 Independence in Appearance . . . . . . 63 Relationship Between Independence in Fact and Independence in Appearance . . . . . . . 66 Implications and Summary Remarks . . . . . . . 69 Chapter Three-~Footnotes . . . . . . . . . . . 73 4 RESEARCH DESIGN AND METHODOLOGY . . . . . . . . . 79 Types of Auditor-Client Relationships Investigated . . . . . . . . 79 Financial Interest (direct and indirect). . . . . . . . . . . . . . 80 Bookkeeping and EDP Services . . . . . . . 82 Family Relationships . . . . . 84 Occupations with Conflicting Interest . . 84 Business and Other Similar Relationships . 85 Economic Client Dependency . . . . 86 Wirtschaftsprufer on Supervisory Boards . 87 Criteria for the Selection Process of Chosen Auditor-Client Relationships . . . 89 Research Medium Employed . . . . . . . . . . . 90 The Questionnaire . . . . . 91 Verification of the Questionnaire Design . 92 vi Chapter Page Target Groups Selected . . . . . . . . . . . . 95 Wirtschaftsprfifer Sample . . . . . . . . . 95 Users of Financial Statements . . . . . . 95 Participation of Target Groups . . . . . . . . 97 Nonusable Responses . . . . . . . . 100 Analysis of Usable Responses from Bank Officers . . . . . . . . . . . 103 Comments on Nonresponse Bias . . . . . . . 103 Hypotheses and Statistical Tests . . . . . . 106 Expected Results and Statistical Tests . . 108 Statistical Tests Employed . . . . . 108 Expected Results and Statistical Tests . . 111 Statistical Tests Employed . . . . . . . . 112 Statistical Tests Employed . . . . . . . . 115 Additional Comments . . . . . . . . . . . 116 Chapter Four-~Footnotes . . . . . . . . . . . 117 5 RESULTS OF THE SURVEY . . . . . . . . . . . . . . 123 Perceptions of Auditors' Independence . . . . 124 Financial Interest (direct and indirect) . . . 128 Conclusions from Statistical Tests . . . . 130 Conclusions from Statistical Tests . . . . 132 Conclusions from Statistical Tests . . . . 134 Conclusions from Statistical Tests . . . . 136 Conclusions from Statistical Tests . . . . 137 Conclusions from Statistical Tests . . . . 143 Bookkeeping and EDP Services . . . . . . . . . 144 Conclusions from Statistical Tests . . . . 14S Conclusions from Statistical Tests . . . . 147 Conclusions from Statistical Tests . . . . 150 Family Relationships . . . . . . . . . 151 Conclusions from Statistical Tests . . . . 152 Conclusions from Statistical Tests . . . . 154 } Occupations with Conflicting Interest . . . . 155 i Conclusions from Statistical Tests . . . . 156 Conclusions from Statistical Tests . . . . 158 Business and Other Similar Relationships . . . 160 Conclusions from Statistical Tests . . . . 161 Conclusions from Statistical Tests . . . . 163 Conclusions from Statistical Tests . . . . 165 Conclusions from Statistical Tests . . . . 169 vii A, Chapter Hypotheses IV, V, and VII Hypotheses IV and V Hypothesis VII . Summary of Independence Decisions. Background Variables . Financial Decisions Chapter Five--Footnotes 6 SUMMARY, CONCLUSIONS, LIMITATIONS, AND SUGGESTIONS FOR FUTURE RESEARCH . Summary Conclusions . . . . . . . . . . . . . Implications Pertaining to the German Environment . . . . . Implications Pertaining to the U.S. and International Environment . Limitations Suggestions for Future Research Chapter Six--Footnotes . APPENDIX A APPENDIX B APPENDIX C APPENDIX D SELECTED BIBLIOGRAPHY . viii Page 170 170 173 176 179 195 210 213 214 220 220 223 225 227 230 231 244 257 270 274 Table 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. LIST OF TABLES Type of Auditor-Client Relationships . Participation by Wirtschaftsprfifer (WPs) Participation by Directors of Loan Departments (LKRs) . Participation by Directors of Investment Departments (LWPs) . Analysis of Nonusable Responses - WPs Analysis of Nonusable Responses - LKRs . Analysis of Nonusable Responses - LWPs . Breakdown of Banks Selected by City (not including branches) . . . . . . . . Auditor-Client Relationships Investigated Analysis of Responses to Situation 1 . Analysis of Responses to Situation 2 . Analysis of Responses to Situation 3 . Analysis of Responses to Situation 4 . Analysis of Responses to Situation 5 . Analysis of Responses to Situation 6 . Analysis of Responses to Situation 7 . Analysis of Responses to Situation 8 . Analysis of Responses to Situation 9 . Analysis of Responses to Situation 10 Analysis of Responses to Situation 11 Analysis of Responses to Situation 12 ix Page 67 99 99 99 101 102 102 104 125 129 131 133 135 138 142 146 148 149 153 155 157 Table Page 22. Analysis of Responses to Situation 13 . . . . . . 159 23. Analysis of Responses to Situation 14 . . . . . . 161 24. Analysis of Responses to Situation 15 . . . . . . 163 25. Analysis of Responses to Situation l6 . . . . . . 165 26. Analysis of Responses to Situation l7 . . . . . . 168 27. Comparison of Consensus Responses of WPs and Rulings of the AICPA and the SEC . . . . . . . . . 171 28. Summary of Testing Hypotheses IV, V, and VII for the Situations Investigated . . . . . . . . . . . 172 29. Comparison of Majority Responses of WPs and CPAs . . . . . . . . . . . . . . . . . . . . . . . 174 30. Summary of Consensus for 27 Auditor-Client Relationships . . . . . . . . . . . . . . . . . . 178 31. Summary of Testing Hypotheses I, II, III, and V1 for the Situations Investigated . . . . . . . . . 180 32. Comparison of Responses from WPs Associated with WPGs Involved in Auditing U.S. Subsidiary Firms (WPuS) with WPs Not Associated with Such WPGS (wpna) . . . . . o . . . o o . . . . . . . . 182 33. Type of Accounting Firm Affiliation of WP Respondents . . . . . . . . . . . . . . . 186 34. Significant Differences of Responses Due to Accounting Firm Affiliation . . . . . . . . . . . 186 35. Breakdown of WP Respondents by Area(s). of Professional Emphasis . . . . . . . . . 188 36. Pearson Correlation Coefficient for Years of Experience . . . . . . . . . . . . . . . . . . . . 190 37. Responses of LKRs to Questions 82, B3, and B4 . . 192 38. Responses of LWPs to Questions B2, B3, and B4 . . 193 39. LKR Responses to Questions B2 and B4 to Selected Situations . . . . . . . . . . . . . . . . . . . . 196 40. LWP Responses to Question B3 to Selected Situations . . . . . . . . . . . . . . . . . . . . 196 Table 41. 42. 43. 44. 45. Analysis of Lending Decision . Analysis of Investment Decision Comparison of Means for Financial Decisions Probabilities of Incorrectly Rejecting Null Hypotheses VIII and IX . . . . . . . . Mean Responses of Financial Decisions by LKRs and LWPs and Significance Levels . xi Page 200 202 204 206 207 LIST OF FIGURES Figure Page 1 Venn Diagram . . . . . . . . . . . . . . . . . . . 69 xii CHAPTER ONE INTRODUCTION This study investigates empirically the perceptions of German auditors' (Wirtschaftsprfifer) independence by German auditors and by users of financial statements that are audited by German auditors. One of the major issues facing the German accounting profession is the independence of auditors from their clients. German accountants have been the target of some severe criticism in the financial press and in the accounting literature.1 Some of this criticism is similar to the criticism expressed in the United States, questioning the auditors' ability to remain independent from those who pay their audit fees.2 Even though the independence of Wirtschaftsprflfer (WPs) has been questioned for a long time, the call for better conventions and regulations has become more accentuated in recent years.3 Various cases of corporate bankruptcy occurring shortly after an unqualified opinion had been issued have raised some doubtsabout the value (xf the ‘WPs' work and their ability to arrive at objective and unbiased decisions.4 Suggestions have been made to strengthen the WP5' independence status by having more specific rules guiding the auditors' conduct, changing the liability laws to allow a third party to sue for damages for less than only gross negligence by the auditor, establishinngISEC type government agency, etc. These suggestions are discussed in more detail in Chapter Three. The reason auditors' independence has been an issue for so long, in Germany as well as in the United States, is inherent in the unique role of the auditor in the business society and the intrinsically difficult problem of applying the concept of inde- pendence to the real world. The auditor is engaged and paid by his client (the auditee) to express an opinion on the auditee's financial statements. These financial statements are then used by third parties (users of financial statements) as one source of information on which to base economic decisions. Thus, the auditor's primary responsibility is to the users of financial statements, and the main purpose of the audit function is to lend credibility to the financial statements to help protect lenders and investors and to provide fbr a more efficient flow of capital. In order to fulfill the function assigned to him by society, the auditor must be independent from his client, i.e., he must be able to form his Opinions and audit judgments objectively and derive these in an unbiased fashion. Thus, the auditor's independence is one of the most, if ‘not the most, important auditing standards. The Chairman of the Securities and Exchange Commission (SEC), H. M. Williams shares the view of many when he says that "independence is the auditor's singde most valuable attribute".5 However, the concept of inde- jpendence has come to mean not only the ability of the auditor to make objective and unbiased decisions while performing the audit, but also that others believe that he is able to do so. The former is usually referred to in the U.S. accounting literature as independence in fact and the latter as independence in appearance. For an auditor to fulfill his role as an unbiased judge of financial statements, he must be both. Even though these two types of independence are implicit in the audit function, they are explicitly demanded from the German auditor by law and regulations6 as they are required for U.S. auditors by their 99 g of Ethics and SEC rulings.7 Independence in fact is an individual auditor's perception concept and may differ between auditors. Consequently, in a situ- ation where one auditor will decline an audit engagement because he feels that he is not able to make independent audit decisions, another auditor may honestly believe that he can make independent decisions. As discussed in Chapter Three, this type of independ- ence is not objectively measurable and it is not practical to devise any specific rules dealing with independence in fact. This study deals with independence in appearance as perceived by WPs and by German bank directors of loan departments (LKRs) and investment departments (LWPs). As is explained more fully in Chapter Three, specific rules are appropriate to deal with independence in appearance. It is felt that this study will provide empirical evidence of how WPs and two important financial statement user groups perceive the appearance of auditors' inde- ;pendence in order to determine the extent to which specific rules (In independence in;appearance are needed. Due to the types of auditor-client relationships investigated, this research may also be helprl in providing U.S. rule making bodies and U.S. practitioners with some insight as to how auditors in another country view some of the independence issues. Research Objective The controversy surrounding the independence status of the German accounting profession, as expressed in the German financial press and accounting literature, suggests that there is a consid- erable lack of consensus concerning the circumstances which would render the auditor not independent from his audit client. Such lack of agreement may imply that: (i) perceptions of what constitutes an independent (or not independent) auditor-client relationship differ between auditors themselves and/or between auditors and users of financial statements; or (ii) current independence rules and regulations are per- ceived to be insufficient (or even improper) by users of financial statements and perhaps by WPs, as some criticism by accounting practitioners seems to indicate;8 or (iii) it is a combination of the first two factors. This investigation attempts to clarify the "state of being" of these perceptions and their meanings. To broaden the scope of this study, the situations investigated include a number of auditor-client relationships for which the American Institute of Certified Public Accountants' (AICPA) and the SEC's position concerning auditors' independence is known. The objective of this research is four-fold: first, to investigate the German accounting profession as to its regulations, laws, guidelines and literature that relate to this study of WPs' independence; second, to provide empirical evidence concerning the perceptions of auditors' independence in appearance within the German auditing profession, and between WPs and users of financial statements audited by German auditors; third, to determine whether the financial decisions by users of financial statements are affected by their perceptions of the independence status of the auditor; and fourth, to compare how German auditors' perceptions of independence differ from the positions taken by the AICPA and the SEC as to the relationships between auditor and auditee that render the auditor independent cur not independent. Research Hypotheses The various hypotheses to be tested are stated in their null form below. The research hypotheses and their statistical forms are presented in Chapter Four. There are a total of nine different hypotheses: 1. HO: There is no consensus among Wirtschaftsprfifer (WPs) regarding their perceptions of the concept of auditors' independence. 11. HO: There is no consensus among Leiter der Kredit- abteilung (LKRs) of banks located in Germany regarding their perceptions of the concept of auditors' independence. 111. HO: There is no consensus among Leiter der Wert- papierabteilung (LWPs) of banks located in Germany regarding their perceptions of the concept of auditors' independence. IV. H0: There is consensus among Wirtschaftsprufer (WPs) regarding their perceptions of the concept of auditors' independence that coincides with AICPA rulings on independence. V. HO: There is consensus among Wirtschaftsprfifer (WPs) regarding their perceptions of the concept of auditors' independence that coincides with SEC rulings on independence. VI. H0: There are no differences regarding the perception of the concept of auditors' independence between Wirtschaftsprfifer (WPs), Leiter der Kreditabteilung (LKRs) and Leiter der Wertpapierabteilung (LWPs) of banks located in Germany. VII. H0: There are no differences regarding the perception of the concept of auditors' independence between Wirtschaftsprfifer (WPs) and Certified Public Accountants (CPAs). VIII. H0: Leiter's der Kreditabteilung (LKRs) perceptions regarding the concept of auditors' independence have no effect on their lending decisions. IX. H0: Leiter's der Wertpapierabteilung (LWPs) percep- tions regarding the concept of auditors' inde- pendence have no effect on their investment decisions. Importance of the Study The importance of this research lies not only in its contribution to German accounting practice but also to accounting practice in the United States and international practice of professional accounting. Each category is discussed separately. Contribution to German Accounting Practice The German auditor's conduct is guided mainly by general rules, regulations and conventions. There are only a few types of auditor-client relationships which are specifically prohibited due to lack of auditors' independence in appearance. The German auditor does not have the advantage of his U.S. counterpart, especially those CPAs with SEC clients, who can consult a lengthy casuistry such as Accounting Series Releases (ASRs) 126 and 234 which enumerates circumstances that will impair independence. Empirical evidence indicating how German auditors perceive the concept of independence would provide some insight concerning how practitioners have been interpreting those general rules of conduct and whether the practitioners are in agreement with some of the specific rules in existence for German auditors. Any lack of consensus among WPs' perceptions of independence would suggest a need for more specific guidelines. By investigating the perceptions of German financial statement users concerning auditors' independence, a better understanding of how these users' perceptions of independence differ from those expressed by WPs can be gained to determine potentially sensitive auditor-client relationships. Since the two financial statement user groups were asked to indicate how their independence perceptions would affect their financial decisions, the results of this study will provide some evidence as to whether WPs' independence is as important an issue as is claimed in the literature. Contribution to U.S. Accounting Practice This study investigates areas of conflict regarding the concept of independence for the German auditing profession. However, since the purpose of auditing is, or should be, similar kar all countries as long as the economic systems are similar, the areas of conflict chosen are, with few exceptions, also areas of conflict in the United States. Even though the auditor-client relationships investigated are limited due to the nature of the research tools employed, an effort was made to include situations between auditors and their clients which are of particular interest to the U.S. accounting profession due to differences in independence rules promulgated by the AICPA and the SEC. Thus, this study may provide empirical support for either the AICPA or SEC position regarding auditors' independence. In a sense it may also serve partly as a follow-up study of prior research done in 1973 by Lavin concerning the independence status of U.S. auditors.9 Lavin's research included a mail survey questioning CPAs and two different financial state- ment user groups as to their perceptions of auditors' independence for a variety of different auditor-client relationships. He found that the respondents to his survey did not as a whole agree with either the positions taken by the AICPA or the SEC on auditors' independence. Furthermore, this study will give limited insight to U.S. auditors who must rely on the work of German auditors that is incorporated in the U.S. parent company's consolidated financial statements, as to the degree to which their German counterparts agree with U.S. rules on independence. Even though perceptions on independence may not be substituted for actual behavior, questions could be raised if the results show that German auditors tend to disagree with most U.S. independence rules. For example, the SEC, via ASR 112, requires foreign auditors of a U.S. subsidiary, with minor exceptions, to conform to the SEC standards of independence in an audit of the consolidated financial statements of a U.S. corporation. Considering the size of U.S. direct investment which at the end of 1977 had a book value of $10.4 billion, and the fact that Germany has the most highly industrialized economy in Europe,10 would suggest that an investigation into the independence of their auditors may be of benefit to a rising number of non-German in- vestors of German corporations. It has been suggested that there is not a very high correlation among the movements of world stock markets which implies that the risk of a given stock portfolio could be reduced by diversifying abroad. For example, Morgan Guarantee Trust Co. aims to have approximately five percent of the $10.2 billion employee benefit fund equities it manages invested in foreign stocks.11 It is predicted that this trend of U.S. financial institutions investing in foreign stocks will increase in the future}2 It seems that three factors: the soundness of the German economy, the relative stability of its currency supported by the second largest exporting industry in the world, and an inflation rate consistently among the lowest of all Western countries, make stocks of German corporations a prime target for U.S. and other non-German investors. Contribution to International Accounting Practice At the 11th International Accountants Congress, hosted by the German accounting profession in Munich in October of 1977, the International Federation of Accountants (IFAC) was founded. 11u3 IFAC is comprised of 63 organizations representing 600,000 accountants in 49 countries and replaces the ll-nation International 10 Coordinating Committee for the Accounting_Profession (ICCAP). The purpose of the IFAC is to develop compatible guidelines in technical, ethical and educational areas for the international accountancy profession.13 Its first president is Dr. Goerdeler, a past president of the German Institute of Certified Public Accountants (Institut der Wirtschaftsprfifer). International accounting standards are issued by the Inter- national Accounting Standards Committee (IASC) which thus far has issued ten International Accounting Standards. Even though the IASC has not yet dealt with the standard of independence, it is just a matter of time until it will have to confront this issue. Any empirical evidence, even if it is, in a strict sense, limited to the accounting profession of one country, may prove helpful fur the decision making process of this international accounting body. The German accounting profession appears to be of special interest since it is one of the best developed professional accounting bodies in Western Europe.14 Consequently, investigating how German auditors perceive auditors' independence should play a role in the formulation of any international accounting or auditing standards. Summary and Outline of Research This study attempts to provide some empirical evidence concerning the perceptions of auditors' independence as perceived by German auditors and two user groups of financial statements. The concept of independence is made up of two parts -- independence in fact 11 and in appearance. Independence in appearance is a collective perception concept that rests on an empirical foundation. It is this part of auditors' independence which is investigated in this research effort. However, this investigation is constrained by the limited number of auditor-client relationships, and any conclusions reached must of necessity be confined to those situations investigated. This research is presented in six chapters. In Chapter Two the German accounting profession is discussed, including the professional duties of WPs and their organizational structure. The German accounting literature is reviewed in Chapter Three. In the same chapter a framework is developed to resolve the independence problem, given certain assumptions. Chapters Four and Five deal with the research design employed and the results of the survey, respectively. A summary, conclusions and suggestions for future research are presented in Chapter Six. 10. 11. 12. 12 CHAPTER ONE -- FOOTNOTES See Chapter Three for a discussion of some of the criticism. For the most recent criticism on the U.S. accounting profession, see The Accounting Establishment: A Staff Study,by Lee Metcalf, Chairman (Washington, D.C., U.S. Government Printing Office, 1977). Two of the more vocal critics are: Kicherer, H-P., "Zur Unabhangigkeit des Abschlussprfifers," Die Aktiengesellschaft (February 1972) pp. 37-40; Richter, M., "Die Stellung des Abschlussprfifers im Entscheidungs - und Kontrollprozess der Aktiengesellschaft," Diskussionsbeitrfige - Fachbereich Wirtschaftswissenschaft, Universitat des Saarlandes (September 1977). The Herrstatt Bank bankruptcy in 1974 is one of the better known cases.which was also covered in the U.S. financial press. See, Kruk, M., Wirtschaftsprfifer als Aufsichtsrate? Gefahren ffir den Ruf des Berufsstandes," Frankfurter Allgemeine Zeitung (April 9, 1975) p. 13. The CPA letter (January 23, 1978) p. 1. Gesetz fiber eine Berufsordnung der Wirtschaftsprfifer (Wirt- schaftsprfiferordnung) i.d.F. der Bekanntmachung der Neufassung v. November 5, 1975 (Dfisseldorf, IdW-Verlag GmbH, 1976) pars. 43 and 49. For AICPA rulings see: Code of Professional Ethics, American Institute of Certified Public Accountants (March 1975 ed.); for SEC rulings see: iRule 2-01 of Regulation S-X as discussed in: Accounting Series Release No. 126 (July 5, 1972). See Huppertz, W., "Die widersprfichliche Lage des Wirtschafts— prfifers bei der Abschlussprfifung," Blick durch die Welt-- Handelsblatt (November 4, 1976) pp. 4-5. Lavin, D., "Perceptions of the Independence of the Auditor," The Accounting Review (January 1976) pp. 41-50. Overseas Business Reports, U.S. Department of Commerce (December 1977) p. 11. Has Morgan Started Something?, Forbes (April 3, 1978) pp. 114. Ibid. l3 13. The CPA letter (October 24, 1977) p. 3. 14. See Lafferty, M. J., "Dominant in Europe," The Accountant (November 14, 1974) pp. 640-644. CHAPTER TWO THE GERMAN ACCOUNTING PROFESSION In this chapter the German accounting profession is discussed by focusing on the following main areas: 1. Organization and structure of the German accounting profession 2. Professional qualificatons 3. Purpose of the German auditor's Opinion (Bestatigungsvermerk) 4. Development and sources of accounting and auditing principles and standards 5. Professional duties and responsibilities of Wirtschaftsprfifer. The purpose of this discussion is to present a cursory over- view of the German accounting profession and to provide the necessary background to interpret the research findings as to its; applicability to U.S. and international accounting practice. (Irggalnization and Structure of the German Accounting Profession IWandatory audits of corporations are performed in Germany by Wi :rtschaftspriifer (WP), roughly the equivalent of the Certified Pub1.j_<: Accountant (CPA) in the United States. Even though the auditing function dates back to at least the Nineteenth Century, it‘WEiss not until 1931 that the profession of WP came into existence by 8<>\rernment action.1 At this time, the Institut der Wirtschafts- EEESEZ}: (IdW) was founded with the purpose of developing accounting 14 15 and auditing principles and standards by advising the Legislature on accounting and auditing matters and by issuing various Opinions (Fachgutachten) and Statements (Stellungsnahmen). The IdW, as Abel points out, "is a professional association in many ways similar to the American Institute of Certified Public Accountants."2 Membership in the IdW is voluntary, although approximately 87 percent of all WPs are members.3 Currently, there are about 3,500 WPs and with a few exceptions, all are practicing accountants. The profession is formally organized into the WP Chamber (Wirtschaftsprfiferkammer), a public sector organization which is loosely supervised by the Federal Ministry of Economic Affairs (Bundeswirtschaftsministerium). All WPs must be members of the Wirtschaftsprfiferkammer (WPK). The dues collected from each WP make the WPK a financially self-supporting organization, financially independent from the government. In essence, the WPK is run by the profession itself, which was the intention of the government when establishing the WPK. Relationship between the Wirtschaftsprfiferkammer and the Institut der Wirtschaftsprfifer Even though the WPK and the IdW are two separate organizations, the former being an organization of the public sector (Kfirperschaft des Uffentlichen Rechts) and the latter a private sector organization (Verein), the relationship between the two is one of close co-operation. They are both located in the same building, the Wirtschaftsprfiferhaus in Dusseldorf, can be reached under the same telephone number, and often use the same stationery with both names in the letterhead. 16 Since a number of WPs serve on committees of either body, the fact that these are indeed two separate entities becomes somewhat blurred. Nonetheless, the functions of the WPK are primarily to oversee the profession's ethical practices, advise WPs on various matters involving conduct and ethical considerations, initiate disciplinary action when deemed necessary, maintain the professional roster (Berufsregister), and issue and update periodically the 21332; gives (Richtlinien fur die Berufsausfibung der Wirtschaftsprfifer).4 The IdW's function deals mainly with the interpretive technical aspects of the profession. A large number of committees work on various accounting and auditing problems and their findings and recommendations are published by the IdW as Statements (Stellungsnahmen) and Opinions (Fachgutachten).S These pronounce- ments are usually heeded by the profession. Even though they do not have the force of law, a WP must justify departure from any of the IdW's pronouncements. In case of a legal dispute, noncompliance would certainly be considered a negative factor in any court proceedings.6 The IdW also has its own publishing house (Verlag) and publishes many books that are of interest to the profession, including all of its in-house work; e.g., The WP-Handbook (WP-Handbuch) and the bi-weekly Die Wirtschaftsprfifung, the IdW's accounting journal. The WPK keeps its members up-to-date mainly with its publication of the Fachnachrichten and the Mitteilungsblatt der Wirtschafts- pruferkammer, which to some extent duplicate information that is already included in the IdW's accounting journal and/or vice versa . 17 Size of the WP Profession As noted earlier, there are about 3,500 Wirtschaftsprfifer registered in Germany.7 For a country of over 62 million inhab- itants, with per capita income comparable to that of the United States, this is a surprisingly small number. In contrast, the U.S. has in excess of 160,000 CPAs. The question that arises is how such a small body of professional accountants can meet the accounting needs of such a large and highly industrialized country as Germany. Apparently the work is done and, according to officials of the WPK and the IdW, there is no shortage of WPs and there are no plans to increase significantly the size of the profession.8 Some of the reasons that may explain the relatively small size of the German accounting profession are: (i) A five year work experience requirement must be met before sitting for the WP-exam. (Until recently it was six years). For persons without a Diplom,9 the experience requirement is ten years. (ii) The WPK's Directives allow a one to five ratio of WPs to assistants. Therefore the audit personnel could actually be 21,000 persons and probably is. (iii) The Professional Law (Wirtschaftsprfiferordnung) prohibits WPs from engaging in incompatible occupa- tions, e.g., employment as an internal auditor for a corporation would result in loss of his WP certif- icate. Such a person would no longer be counted as a WP, contrary to U.S. practices, where a large number of CPAs are not involved in public accounting but are employed by corporations as controllers, financial officers, etc. Therefore, the number of registered WPs is very close to the number practicing. (iv) There are relatively few entities that must undergo a mandatory annual audit.10 18 (v) There are approximately 15,000 Certified Tax Consultants (Steuerberater) that do most of the tax work and also set up financial statements, similar to unaudited financial statements in the U.S.11 Thus given these considerations, it is conceivable that there are indeed sufficient WPs to do the required accounting work.12 Characteristics of the Profession The WP profession is predominantly male. Less than two percent of the WP5 are female.13 A large number of WPs (sixty—six percent) are also qualified as Steuerberater, and approximately five percent have a law degree. About thirty percent hold a doctoral degree and a few even hold the title of professor.14 The profession is about equally divided into those WPs who are single practitioners and those who practice with an auditing association15 (WirtschaftsprUfungsgesellschaft). Most of the Wirtschaftsprfifungsgesellschaften (WPGs) employ less than five WPs. There is, however, some concentration. The ten largest WPGs employ approximately twenty percent of all WPs.16 Most of the WPGs are organized as corporations, the majority being limited liability companies (Gesellschaften mit beschrankter Haftung) although a small number are organized as public corpor- ations (Aktiengesellschaften). Both organizational structures permit outside shareholders, even though an Aktiengesellschaft (AG), being a public corporation, is required to publish audited financial statements.17 Ownership of WPGs by non-WPs is allowed under the law and, to some degree, still exists. The largest shareholder of the biggest WPG, Treuarbeit AG, is the Federal 19 government of Germany. A study by Schruff, published in 1973, disclosed the relationship of shareholders of certain WPGs and share- holders of audit clients and points out the possible illegality of some of these relationships, as well as the shadow it casts on the independence of those WPGs.18 As a result of this study, some stockholders divested themselves of a portion of their financial interest in wpos.19 "Big Eight" International Accounting Firms All of the "Big Eight" accounting firms are represented in Germany. Five are affiliated with German WPGs, and three are not.20 Approximately five percent of all WPs are associ- ated with or employed by "Big Eight” accounting firms.21 Since a large number of these WPs are also associated with at least one German WPG, it is difficult to make any infer- ences about the market share these "Big Eight" accounting firms have in Germany based on the number of WPs employed. It is not uncommon for a WP to belong to more than one WPG.22 It may be of interest to note that most of the "Big Eight" accounting firms are organized as Gesellschaften mit beschrfinkter Haftung (GmbHs), as are most of the German WPGs. 20 Even though a GmbH is only liable up to its paid-in capital, a WPG is exempted from this type of limited liability. Regard- less of the structure of the organization in which a WP practices, his maximum liability is 500,000 Deutsche Mark per audit. The law mandates that each WP must have sufficient liability insur- ance. Any agreement that fixes liability below 500,000 Deutsche Mark per audit is void. Professional Qualifications To gain entry to the German public accounting profession, an applicant must meet the requirements delineated in the Wirtschaftsprfiferordnung (WPO). The general requirements are: 1. A Diplom from a university in one of the following areas: economics, business, law, agriculture, or engineering. 2. Five years of practical experience, four years of which should consist of relevant auditing experience. 3. Successful completion of a written examination, consisting of questions dealing with auditing, economics, business-economics (Betriebswirtschaft), business law, and tax law. There are seven separate parts taken on seven different days, each lasting between four to six hours.23 4. Successful completion of an oral examination before a board of examiners. To take the examinations, the applicant must have satisifed the five year work experience requirement.24 The examinations can only be repeated twice and must be passed in their entirety at one time.25 It is generally agreed that the examinations are quite difficult 21 to pass and that people who do not plan to stay in public accounting usually do not take them.26 Purpose of the German Auditor's Opinion (Bestfitigungsvermerk) An unqualified standard auditor's opinion reads as follows: "The accounting, the annual financial statement and the management report which I (we) have examined with due care, comply with law and company's statutes."27 The audit objective of the German auditor emphasizes compliance with accounting standards as anchored in laws; but, as the codified auditing standards point out, the audit purpose is also that within the framework of compliance with the law the financial statements should "permit as accurate a view as possible of the financial position and results of operation."28 The WP is not "responsible for the failure to discover defalcations and similar crimes unless he should have discovered them by applying generally accepted auditing standards and techniques."29 For comparison purposes, the objective of U.S. audits is stated below: "The objective of the ordinary examination of financial statements by the independent auditor is the expression (af'an opinion on the fairness with which they represent financial jposition...in conformity with generally accepted accounting principles."30 Since relevant laws are to the German auditor accounting principles which by definition are generally accepted due to the force of law, the audit objective of the WP and of the CPA 22 are basically the same.31 Both are interested in a fair view (or as accurate a view as possible) of the financial position of the audited entity within the framework of generally accepted accounting and auditing principles.32 Consequently, research into German auditors' independence may also be of benefit to the U.S. accounting profession since the audit purposes of the profession in the two countries are compatible. Development and Sources of Accounting and Auditing Principles and Standards Accounting and auditing principles and standards that must be observed by force of law are determined in general by Federal Company Laws. That accounting principles and standards are based in law is also reflected by the fact that the WP in his audit report does not give his opinion as to the fairness of the financial statements as does the U.S. auditor, but merely attests that the audited financial statements comply with the law. German Company Law has been a federal matter since 1870.33 Consequently, "the necessity to treat the issuance of securities as a separate matter of national concern against the backdrop of divergent state law did not arise. The absence of charter- ‘mongering practices may be the reason that Germany has no regula- tory enactments comparable to our (U.S.) federal securities 1aws."34 The most recently enacted Company Laws are the Stockcorpor- ;ation Law of 1965 (Aktiengesetz 1965) and the Disclosure Law 23 of 1969 (Publizitéitsgesetz).35 Considering that the Stockcorpor- ation Law of 1965 is a revision and update of the Stockcorporation Law of 1937, would suggest that new company laws are very slow in the making.36 Since law making is essentially a political process, the resulting legislation is often not all-inclusive and requires authoritative interpretation. Commentaries (Kommentare) interpreting and explaining the law are published and revised periodically. There are a number of Commentaries available. Some of the revisions of these Commentaries reflect court inter- pretations of the law; however, many interpretations are made by the authors of these Commentaries.37 A number of the authors or co—authors of these Commentaries are WPs, some of whom hold very important positions in the WPK and/or the IdW. The Commentaries are an important authoritative source for the practicing auditor and to some extent help form accounting and auditing standards. The WP-Handbuch, published by the IdW also provides authorita- tive guidance to the members of the German accounting profession. It presents interpretations of the laws, directives, rules and regulations, and discusses auditing techniques. The WP-Handbuch is revised every four or five years, (the latest revision was completed in 1977) and could be considered a factor in formulating and applying accounting standards. Another source of guidance for the WP are the numerous Opinions and Statements by the various committees of the IdW which are generally observed by the profession since, as mentioned earlier, noncompliance may have adverse consequences to the WP in a legal dispute. The IdW's Opinions and Statements serve the same purpose 24 as AICPA pronouncements concerning auditing and accounting matters and statements issued by the Financial Accounting Standards Board (FASB) in the United States. The Opinions and Statements give technical guidance to the profession as to what are generally accepted accounting and auditing standards. Thus, the German codified auditing standards (revised in 1977) are entirely the product of committees of the IdW.38 The pronouncements by the WPK also shape accounting and auditing standards, especially the Directives and the advice given to the WP profession by the WPK. Even though a direct comparison of the development of German and U.S. accounting and auditing standards and principles is rather difficult, it seems that the WP profession has as much influence in determining these standards and principles in Germany as does the U.S. accounting profession in the United States. Any differences in the generating process are more in form than in substance, including the formulating of the Stockcorporation Laws on which the WP profession has exerted a strong influence. Professional Duties and Responsibilities of Wirtschaftsprfifer The conduct of a Wirtschaftsprfifer is guided mainly by the Wirtschaftsprfiferordnung, the Directives of the WPK, and the YStockcorporation Law. These three sources of authoritative guidance will be discussed separately. 25 The Wirtschaftsprfiferordnung (WPO) The WPO is the Professional Law (Berufsordnung) of the WP. It has been in existence since 1961 and is revised from time to time. The latest revision was completed at the end of 1975. The WPO regulates the professional conduct of the accounting profession. Paragraph 43 requires the WP to exercise his profession independently, conscientiously, discreetly, (verschwiegen) and responsibly. It also states that he must not engage in activities which are incompatible with his profession or the reputation of the WP profession. Activities that are compatible with the profession of Wirtschaftsprfifer include all consulting and trustee activities, any other professional activity in the areas of engineering and law, employment at a research institute, or college teaching. A WP is also permitted to engage in any kind of writing or any other artistic activity.39 Paragraph 49 of the WP0 mandates that a WP must decline an engagement if there is reason to believe that the circumstances may cause his independence to be questioned (Besorgnis der Befangenheit).40 The WPO is silent as to what circumstances would impair independence. The Directives (Richtlinien) of the Wirtschaftsprfiferkammer (WPK) The WPK derives its legal authority to issue the Directives to the WP profession from the WP0. These Directives are revised periodically. The latest revised version was mailed to all WPs in December 1977.41 The Directives elaborate on paragraphs 43 and 49 of the 26 WPO and discuss the important characteristics of the WP profession in more detail. The WPK considers the following attributes to be all-important: 1. Due care (Gewissenhaftigkeit) 2. Individual responsibility (Eigenverantwortlichkeit) 3. Secrecy (Verschwiegenheit) 4. Impartiality (Unparteilichkeit) 5. Independence and unbiasedness (Unabhfingigkeit and Unbefangenheit) Each characteristic will be discussed briefly. The requirement of exercising due care is similar to the U.S. auditing standard of due care and thus needs no further elaboration here. Individual responsibility stresses that the individual WP is responsible for his decisions and cannot shirk this respon- sibility. Thus, the audit report is always signed by the WP in charge of the audit. For larger audit clients, two individual signatories may sign the audit report. The purpose of this requirement is to underline that auditing is a Profession (freier Beruf), in contrast to an employee-employer relationship. WPs employed by WPGs are indeed employees, but since by law a WP in a WPG must have procuration (prokura), this is considered sufficient for a WP in such a position to be responsible for his decisions. The requirement for secrecy mandates that a WP or any of his assistants must not divulge confidential or inside information nor use it for personal gain. The profession considers secrecy 27 so important that WPs must have their assistants and/or employees sign a written statement swearing themselves to secrecy. Impartiality refers mainly to WPs who are called to testify as expert witnesses. It applies to auditing as well but it seems that this would be covered by the mandate for independence and unbiasedness which appear to be stricter requirements than impartiality. The independence and unbiasedness standards state that a WP must be free from influences, connections and considerations which could impair his independence and unbiasedness. Furthermore, it compels a WP to decline an audit engagement when his independ- ence is impaired or if he feels himself to be biased even in cases where the applicable law concerning the selection of an auditor would not prohibit such an engagement. In the WPK's latest revision of the Directives, the WPK has finally taken a stand concerning direct financial interest of a WP in his client firm. Effective January 1979, a WP who owns any shares of a client firm will not be considered independent if auditing this client's records. The Directives also prohibit a WP from auditing a client when he has basically prepared the financial statements of the client. The Directives are less specific for other auditor-client relationships. 111e Stockcorporation Law The Stockcorporation Law of 1965 specifies how financial statements of a corporation (usually an AG) must be prepared and mandates that they be audited by WPs. This law deals with the 28 problem of ensuring auditor and/or WPG independence by listing a limited number of cases in which auditors are not considered to be independent. Any audited financial statements would be null and void (nichtig) in these cases. The Stockcorporation Law of 1965 specifies that only WPs and WPGs may act as auditors for mandatory audits. The auditor- client relationships which are covered by this law prohibit a WP from performing an audit if he: la) is or was within the last three years prior to his appointment a member of the board of management or of the supervisory board or an employee of the com- pany to be audited; 2a) is a legal representative or member of the supervisory board of a legal entity; member of a partnership or owner of a sole proprietorship, if such legal entity, partnership, or sole proprietorship is related to the company to be audited; 3a) is an employee of an enterprise related to the company to be audited. An auditing firm (WPG) may not act as auditors lb) if it or any enterprise related to it is related to the company to be audited; 2b) if a legal representative of an auditing firm which is a legal entity, or a partner of an audit firm, could not act as auditor pursuant to 1a, 2a, and 3a above; 3b) if a member of the supervisory board of an auditing firm could not act as auditor pursuant to la above.42 This casuistry was limited to these basic situations intention- ally. As early as 1959 the Government Draft (Referentenentwurf) of the Stockcorporation Law of 1965 was discussed by the IdW. The IdW concluded that the circumstances which would render the audited financial statements null and void should be limited 29 to very basic situations that would be readily apparent to all. They thus welcomed the very limited casuistry delineated in the final law. For circumstances not specifically covered by the Stock- corporation Law of 1965, the auditor, as the IdW points out, should be guided by the principles of the profession (Berufsgrundsfitze des Berufsstandes) which mandate that a WP must decline an (audit) engagement if he is not free from influences, connections and considerations when making decisions and judgments.43 Besides the limited casuistry, the Stockcorporation Law of 1965 has a second provision to ensure a suitable auditor. Para- graph 163 states that the auditor's engagement may be terminated and "the court shall appoint another auditor...if this appears to be mandatory for a personal reason of the elected auditor; especially if partiality (Besorgnis der Befangenheit) must be presumed. The motion [of dismissal]...can only be made by a person who has objected to the selection of the auditors in records of the [shareholders'] meeting."44 Adler/Dfiring/Schmaltz, in their interpretations of this paragraph, comment that for an auditor not to be independent in appearance (Besorgnis der Befangenheit) there must be cir- cumstances which provide fur self-interest in the results of the audit by the auditor. They cited as one example a situation where an auditor owned a significant number of stocks of the auditee, and as another example the situation where an auditor may have to consider the interests or wishes of third parties (such as relatives).45 30 This opportunity to object to the proposed auditor or WPG at the annual stockholders' meeting would appear to be a good vehicle to help ensure selection of a suitable auditor. However, it has very seldom been employed, if ever.46 The WP or WPG proposed by management to do the audit is usually elected by the stockholders at the annual stockholders' meeting without objection. Summary Remarks The preceding discussion seems to indicate that the German accounting profession is well organized and that competency levels of WPs are at least equivalent to U.S. CPAs based on educational backgrounds, work experience and examination requirements. The general rules and regulations regarding the requirement for auditors' independence are similar to those governing U.S. auditors. However, specific guidelines to determine what con- stitutes an independent (or not independent) auditor-client relationship are few in number. The German accounting profession rec0gnizes that for an auditor to be truly independent he must be independent in fact as well as independent in appearance. This is the same concept of independence accepted by the U.S. accounting profession.47 The identical concepts of independence and the fact that the purpose of the German auditors' work is basically the same as that of his U.S. counterpart, make findings of empirical research on the concept of independence of German auditors possibly useful 31 to the accounting profession in the United States as well. In the following chapter the concept of independence will be examined and the relevant German literature will be reviewed to provide a conceptual framework for this empirical study. 10. 11. 32 CHAPTER TWO--FOOTNOTES Koch, W., Der Beruf des Wirtschaftsprfifers (Berlin: Duncker G Humblot, 1957), p. 55. Abel, R., The German Experience with Uniform Accounting_and its Relevance to the U.S. Controversies on Uniformity (Un- published Ph.D. dissertation, Columbia University, 1967), p. 78. Wirtschaftsprfiferkammer, WP—Verzeichnis 1976/77 (Dfisseldorf: IdW-Verlag GmbH, 1977), p. LIII and p. X. As of December 1976, there were 3,339 Wirtschaftsprfifer of which 2,913 were members of the IdW. For a complete list of the duties and responsibilities of the WPK see, Gesetz fiber eine Berufsordnung der Wirtschafts- prfifer (Wirtschaftsprfiferordnung) Stand: November 5, 1975 (Dfisseldorf: IdW—Verlag GmbH, 1976), pp. 37-44. For a list of committees see, WP-Handbuch 1973 (Dfisseldorf: IdW-Verlag GmbH, 1973), pp. 88-89. Ibid., p. 53. As of December 1976, there were 3,339 WPs registered with the Wirtschaftsprfiferkammer, according to the WP-Verzeichnis 1976/77. Per conversation of this researcher with Mr. Pfefferer of the WPK and with Mr. Kaminski of the IdW on December 12, 1977. A Diplom is approximately equivalent to a Master's degree in the United States. Per Budde, 2,218 mandatory audits were perfbrmed by WPs in 1975; see Budde, H., "Stellungnahme re: 'Die Kontrolle der Kontrolleure', V. Emmerich, in Busse von Colbe, W., and Lutter, M., (eds): Wirtschaftsprfifung;Heute: Entwicklung oder Reform? Ein Bochumer Symposium (Wiesbaden: Verlag Dr. Th. Gabler, 1977), p. 234. Many bank loan officers are making loan decisions based on financial statements prepared by Steuerberater and in many cases do not insist on financial statements audited by WPs. 12. 13. 14. 15. 16. 17. 33 As of January 1978 there was still a controversy between representatives of the Wirtschaftsprfifer profession and the Steuerberater profession about who shall audit GmbHs if audits of this type of business organization become mandatory. See Forster, K.-H., "Institut der Wirtschaftsprfifer fUr einheitlichen PrUferberuf!" Die Wirtschaftsprufung_(Heft 4, 1978), pp. 100-103. If we consider WPs to be equivalent to partners and managers in U.S. accounting firms, it seems that this breakdown of male and female auditors is similar to present U.S. conditions. See The AccountingLEstablishment: A Staff Study, by Lee Metcalf, Chairman (Washington, D.C. U.S. Government Printing Office, 1977), Appendix D. In Germany, academic degrees become part of a person's name. Thus, all titles and degrees are listed in the WP- Verzeichnis 1976/77 from which this information was extracted. For an exact breakdown see WP—Verzeichnis 1976/77, p. XI. Per WP4Verzeichnis 1976/77, there were 601 WPs out of a total of 3,339 WPs that were affiliated or employed with the 10 largest WPGs. For a surrogate of size the numbers of WPs affiliated or employed were used. The GmbH is a statutory closed corporation, shares of which are not freely negotiable. An overwhelming majority of businesses in Germany are organized as GmbHs. The reason for the popularity of this corporate form, according to Juenger and Schmidt, lies in the "great latitude in shaping its constitution to accomodate management and quotaholders by appropriate charter provisions." (page 3). In addition, as Juenger and Schmidt (page 3) point out, ”quotaholders can, by entering into an appropriately drafted limited partnership arrangement with their company, avoid a double tax burden and enjoy the advantages of partnership taxation without losing the benefits of perpetuity and limited lia- bility." Currently, only the larger GmbHs' financial state- ments must be audited by WPs; however, the Legislature is also considering mandatory audits for GmbHs of smaller size. The AG, on the other hand, is a public corporation. Its shares are freely negotiable and, unless the articles of incorporation provide for registered shares, are issued in bearer furm. Rules for incorporation of an AG, as Juenger and Schmidt (page 5) point out, "is conceived as an important transaction hedged with substantial safeguards. The articles of incorporation are an integral part of the organizational process which is designed to impart information and to assure adequate capitalization." The financial statements of an AG must be audited by WPs. 18. 19. 20. 21. 22. 23. 24. 34 Even though a vast majority of German businesses are organized as GmbHs, the lack of free negotiability of its shares makes organization as an AG mandatory for those businesses intend- ing to sell shares to the public. Consequently, AGs, although fewer in number, "represent by far the greater concentration of economic power" (Juenger and Schmidt, page 4). For a more detailed account, see Juenger, F. K. and Schmidt, L. (translators), German Stock Corporation Act (K61n, Chicago: Verlag Dr. Otto Schmidt KG - Commerce Clearing House, Inc., 1967), pp. 1—21. See Schruff, L., Der Wirtschaftsprufer und seine Pflichtmandate (DUsseldorf: IdW-Verlag, GmbH, 1973). For example, the Treuarbeit AG's majority shareholder, the Federal Government of Germany, reduced its share-holdings from 69.2 percent to 50 percent. See Commerzbank, (ed.), Wer GehBrt zu wem - Apguide to capital links in West German companies (1977), p. 768. This is based on information included in the WP-Verzeichnis 1976/77 which shows various members of the Board of Manage- ment (Vorstand) of a German WPG also as belonging to one of the "Big Eight" accounting firms. The "Big Eight" account- ing firms that were thus affiliated with German WPGs are: Arthur Young 6 Company is affiliated with Intrarevisio Beratungs-und Treuhand GmbH WPG; Coopers G Lybrand with Treuhand- Vereinigung AG WPG; Deloitte, Haskins & Sells with Dr. Wollert - Dr. Elmendorf KG WPG; Touche Ross 5 Co. with Treuverkehr AG WPG; Peat, Marwick, Mitchell 8 Co. with ATB Allgemeine Treuhand und Beratungsgesellschaft WPG. Not affiliated with any German WPG are the following "Big Eight” accounting firms: Arthur Andersen 8 Co.; Whinney, Murray, Ernst G Ernst; Price Waterhouse 6 Co. Treuarbeit AG WPG, the largest German WPG, has a special agreement of cooperation with Peat, Marwick, Mitchell 8 Co. concerning the audits of German subsidiaries firms located in the United States and Canada, according to the 1976 Annual Report of the Treuarbeit AG WPG. Per information extracted from WP-Verzeichnis 1976/77. See WP-Verzeichnis 1976/77. For more details, see Wolff, J., "Die Anderung der Prfifungsordnung fUr WirtschaftsprUfer," Die WirtschaftsprUfung_(Heft 1/2, 1976), pp. 1-4. For additional qualifications, see WP-Handbuch 1977 (DUsseldorf, IdW-Verlag GmbH, 1977), pp. 9-15. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 35 For exceptions to this rule, see Prfifungsordnung fUr Wirtschaftsprfifer, Stand December 51 1976 (Dfisseldorf: IdW-Verlag GmbH, 1976), par. 18. Niehus, R. J., "The Public Accounting Profession in Germany," The Accountant (January 4th, 1973), p. 13. Institut der Wirtschaftsprfifer, Fachgutachten 1/1977-Genera11y accepted standards for the audit of financial statements, Sonderdruck aus der Zeitschrift Die Wirtschaftsprfifupg_ (1977), p. E27. Ibid., p. E3. Ibid., pp. E4-E5. Prior to Statement on Auditing Standards No. 16, issued in January 1977 by the Auditing Standards Executive Committee of the AICPA, the German position on the detection of defalcations and errors was almost identical to the position taken by the AICPA. See Statement on Auditing Standards No. 7, (November 1972) section 110.05. However, SAS No. 16 seems to attribute somewhat more importance to the detection of fraud in the audit function than is apparent in the German position on this subject. American Institute of Certified Public Accountants, Statement on Auditing Standards No. 2 (New York: AICPA, 1973), p. 2. See, for example, Goerdeler, R., "A True and Fair View - or Compliance with the Law and the Company Statutes," Die Wirtschaftsprfifung (Heft 19, 1973), pp. 517—525. See Parczyk, W., "Die amerikanischen Grundsfitze ordnungsmfissiger Abschlussprflfung im Vergleich zu deutschen Prfifungsmaximen," Der Betrieb (Nr. 30, 1970),pp. 73-76. Mining companies are exempted. They are covered under state (Lander) legislation. See Juenger, F. K., and Schmidt, L., German Stock Corporation Act, pp. 4-5. Ibid., p. 4. The Disclosure Law merely extends applicability of the Stockcorporation Law of 1965 to certain larger business entities not organized as an AG. For more information, see Mueller, R., and Galbraith, E. G. (eds. and translators). The German Stock Corporation Law, the German Law on the Accountingfiby major Enterprises other than Stockcorporations - Bilingual Edition (Frankfurt: Fritz Knapp Verlag, 1976), pp. 494-500. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 36 There is the so-called Little Reform Bill which became law in 1960. This bill's major feature is the requirement that the income statement must be prepared in conformance with a model income statement incorporated in the bill. See Raetsch, H., "Financial Statements under the New Stock Corporation Law of the Federal Republic of Germany," Arthur Young Journal (April 1960), pp. 1-11. The most widely used Commentary, often referred to as the "Bible" of the WP, is Adler/Dfiring/Schmalz, Rechnungslegung und Prfifungfider Aktiepgesellschaft - Fourth Edition, bearbeitet von: Schmaltz, K.; Forster, K.-H.; Goerdeler, R.; Havermann, H. (Stuttgart: C. E. Poeschel Verlag, 1971). Institut der Wirtschaftsprfifer, Fachgutachten 1/1977, 2/1977, 3/1977, Sonderdruck aus der Zeitschrift Die Wirtschaftsprflfung_ (German-English). WirtschaftsprUferordnung, par. 43. Paragraph 49 of the WP0 reads as follows: "Der Wirtschafts- prfifer hat seine Tatigkeit zu versagen, wenn...die Besorgnis der Befangenheit bei der Durchffihrung eines Auftrages besteht." Wirtschaftsprfiferkammer, Richtlinien fUr die Berufsausfibung_ der Wirtschaftsprufer und vereidigten Buchprufer (December 1, 1977). Aktiengesetz 1965, paragraph 164 (own translation). This translation draws heavily from the translation by Juenger, F. K., and Schmidt, L., German Stock Corporation Act. WP-Handbuch 1977, p. 50. Mueller, R., Galbraith, E. G., p. 211. According to Richter (page 6) this provision does not necessarily represent any protection. Richter claims that no incident is known where the auditors were dismissed under the provision of paragraph 163 of the Stockcorporation Law of 1965. See Richter, M., "Die Stellung des Abschlussprfifers im Entscheidungs - und Kontrollprozess der Aktiengesellschaft," Diskussionsbeitragg- Fachbereich Wirtschaftswissenschaft, Universitfit des Saarlandes (September 1977). Adler/Dfiring/Schmalz, Band II, pp. 198-203. It should be noted that this was written prior to the December 1977 revision of the WPK's Directives. Prior to this revision, the WPK did not specifically prohibit WPs from owning shares in their audit client firms. See Footnote 44. In Chapter Three the translation conventions used will be discussed in more detail. CHAPTER THREE THE INDEPENDENCE ISSUE IN GERMANY AND THE CONCEPT OF AUDITORS' INDEPENDENCE In this chapter the German accounting literature, its views of the WP independence issue and the solutions that have been suggested will be examined. A framework to resolve the inde- pendence problem will be developed, given certain assumptions. Introduction There is general agreement among auditors and users of audited financial statements that independence of the external auditor is important. Many consider it the most important attribute of the auditor and the auditing profession.1 As Wilcox comments, "independence is an essential auditing standard because the opinion of the independent accountant is furnished for the purpose of adding justified credibility to financial statements which are primarily the representations of management. If the accountant were not independent of the management of his client, his opinion would add nothing."2 The AICPA has defined independence as the "ability to act with integrity and objectivity."3 Even though the "qualities of integrity and objectivity are not precisely measurable, the profession nevertheless constantly holds them up to members 37 38 as an imperative."4 However, this type of independence, also referred to in the U.S. accounting literature as independence in fact, is only one of two components of what will be called "Total Independence". The other component is known in the U.S. literature as independence in appearance. Whereas independence in fact deals with the auditor's state of mind or attitude toward the audit object, independence in appearance, as Arens & Loebbeke point out, "is dependent on others' interpretation of this independence [in fact]".5 Thus, for an auditor to lack independence in appearance it is not necessary for him to be not independent in fact, just having his independence questioned by a legitimate third party is sufficient to render him consequently not (totally) independent. It seems that the requirement for independence in appearance may be the stricter of the two requirements. As noted in the preceding chapter, the German auditor must be independent in fact as well as not lacking independence in appearance, as mandated by paragraphs 43 and 49 of the Wirtschafts- priiferordnung.6 Richter considers both requirements to be of equal importance.7 Both are necessary for German auditors to be independent. The WP-Handbuch points out that it is the professional duty of a WP to consider if his independence in appearance could be questioned for a logical and sound reason (sachlich vernfinftiger Grund) by a third party in which case he must decline his (audit) services. Such a charge cannot be repudiated if the WP himself feels he does not lack an unbiased attitude toward the audit object. The overriding factor is whether a third party, by 39 considering all facts and circumstances, could question the independence and objectivity of the auditor.8 Discussion of the Issues Raised and Solutions Suggested in the German Accounting Literature Concerning WP Independence I The German accounting literature has dealt extensively with the problem of WP independence. An entire issue of the Betriebswirtschaftliche Forschupg und Praxis published in 1976 was devoted to this subject and the recent Bochumer Symposium dealt with the auditor independence issue in great detail.9 Many suggestions have been made of how to better ensure auditors' independence. Some authors advocate strengthening the independence status by using the existing institutions and legal conventions while others have called for drastic changes such as proposing the governmentalization of the audit function. Thus far the U.S. terminology of independence has been used when translating German auditing requirements and research from the German literature, since it more or less seems to convey the best interpretation of the German terms. However, it may be helpful to discuss the German concept of independence in some Inore detail to provide a better basis for the reader's understanding. The German independence issue is sometimes discussed as cxansisting of three, not two, components as listed below, followed bY"their English translation: 1. Unabhangigkeit 40 2. Unbefangenheit 3. Besorgnis der Befangenheit Cassel's German and English Dictionary translates Unabhangigkeit as: independence; autonomy; Unbefapgenheit means: impartiality, freedom from bias; Besopgpis der Befangenheit literally translates as: fear or apprehension of partiality.10 There is no doubt that Unabhapgigkeit and Unbefangepheit are very closely related and usually are used together, sometimes interchangeably, when referring to the auditor's ability to act with objectivity and integrity during an audit. The Wirtschafts- prfiferkammer in its Directives uses the two terms together when it mandates that a WP must be "free from influences...that might impair his Unabhfingigkeit and Unbefangenheit when performing his [audit] duties".11 Some authors, however, perceive significant differences between the two terms. Jackel contends that Unabhangigkeit refers to the legal and economic freedom (Bindungslosigkeit) of the auditor from his audit client.12 Unabhangigkeit to him always represents an "ausseres Verhéltnis", a relationship readily discernable by an outside observer. Jackel believes Unbefapgenheit refers to the auditor's inner unbiased attitude (innere Einstellung) to the audit and his audit client. Both concepts are in close relationship to one other, with Unbefangenheit, according to Jackel, being the more encompassing requirement. This definition of Unbefapgenheit corresponds closely with the U.S. term of independence in fact. Richter refers to Unbefangenheit as faktische Unabhfingigkeit, which is the literal translation of 13 independence in fact. 41 Unabhfingigkeit, on the other hand, seems to correspond more closely to the U.S. term of independence in appearance, if Jackel's definition is followed. To pursue Jackel's reasoning, Besorgpis der Befangenheit also represents the concept of independence in appearance (actually, the appearance of dependence) since, for Besorgpis der Befangenheit to exist, it is not necessary to prove that the auditor is not independent in fact (unbefangen). It suffices if a third party may legitimately question the auditor's independence status. To summarize, Jackel's interpretation of the terms Unabhfingigkeit and Besorgnis der Befangenheit both correspond closely to the U.S. concept of independence in appearance. However, Jackel categorizes independence in appearance as Unabhfingigkeit if it refers to an auditor-client relationship prohibited by the casuistry of paragraph 164 of the Stockcorporation Law of 1965, and inde- pendence in appearance is referred to as Besorgnis der Befanggnheit if it is not--thus representing a general catch-all clause which complements the specific casuistry.14 It seems that this distinction is somewhat academic. Others consider Unabhangigkeit and Unbefanggnheit to be practically synonyms; both corresponding closely to the U.S. concept of independence in fact, i.e., referring to the auditor's perception of his ability to make objective audit decisions. Independence in appearance is usually meant by the concept of Besoggnis der Befangenheit, referring to the perception of a legitimate third party as to the auditor's independence status.15 Consequently, the casuistry of paragraph 164 of the Stockcorporation Law of 42 1965 is considered by these authors a description of auditor-client relationships dealing with Besoggnis der Befangenheit (independence in appearance) only. In this study, Besorgpis der Befangenheit is interpreted as coinciding with the U.S. concept of independence in appearance (or lack of it). Unbefangenheit is usually translated as inde- pendence in fact. Unabhfingigkeit is translated as independence (or independence in fact if the author used it interchangeably :with Unbefangepheit), unless it is apparent that the author uses Unabhfingigkeit according to Jackel's definition, in which case it will be translated as independence in appearance. Auditor-Client Relationships that May Impair Auditors' Independence in Appearance Independence in fact, as noted above, is concerned with the auditor's mental attitude toward the audit object. Wysocki concludes correctly that such an independence concept cannot be codified into specific professional guidelines.16 Realizing this, rule makers in Germany, as well as in the United States, try to attack the independence problem by utilizing the second component comprising the Total Independence concept--independence in appear- enice. They specify a number of auditor-client relationships 11: which lack of auditors' independence is suspect, i.e., the atuflitor is not considered independent in appearance. Wysocki agrees that it is of no concern in these cases whether the auditor is indeed not independent in fact. Auditor—client relationships that may impair independence 43 in appearance have been categorized in a number of different groups and sub-groups. Wysocki's grouping of causes that may infringe upon auditors' independence in appearance involves only two types of auditor-client relationships which seem to cover every situation. They are relationships in which the auditor: 1. has a self-interest (including economic or other personal interest) in the audit results, and those 2. in which the auditor has to take into consideration someone else's interest (economic or personal)in the audit results. ( Personal self-interest is considered to be present in situations 1 where the auditor has a financial interest in the audit, either i as a stockholder or creditor. Economic self-interest is defined 1 by Wysocki as the auditor's dependency on the audit fees from a particular client, i.e., the economic necessity for the auditor to retain the client for future engagements (Kundenabhfingigkeit). Other personal self-interest includes any auditor's relationship to the audit object, e.g., a situation where an auditor must pass judgment on audit evidence which he helped create. Most discussions concerning the independence concept however, deal with the relationships of the auditor to a third party which could affect his objectivity toward the audit work. Wysocki cites the Directives of the WPK which caution that independence in appearance may not be present for relationships between the aiuditor and someone affected by the audit results that are of a personal, family, or business nature. Wysocki realizes that the limited specific guidelines avail- able to the WP to determine what relationship will impair his 44 independence in appearance are not complete by any standard. As an example of the type of auditor-client relationship not covered by any specific rules, he considers a situation where a close relationship exists between an auditor and a high-level executive of an audit client, which, to Wysocki, may impair the auditor's independence in appearance.17 Criticism of the WP Profession Independence Status Raised in the German Accounting Literature The auditor independence issue has come into focus during recent years because of a number of widely publicized bankruptcies of corporations whose financial statements had been audited by WPs, and usually had received an unqualified auditor's Opinion.18 The popular press may have been unfair in some cases by general- izing from some unfortunate incidents to the entire profession. The possibility, as Knief aptly notes, that the public may mis- understand what the auditor's opinion entails, might explain 19 most of the criticism raised in the press. It does not, however explain away some of the criticism raised by members of academe and from members of the WP profession itself.20 The independence problem originates first, in the inherent clifficulties in applying the concept of independence to the regal world and second, in the lack of more specific guidelines cc>vering independence in appearance. The criticism revolves mainly around the laws and regulations cox/eqing auditors' conduct, specifically the Stockcorporation 45 Law of 1965 and the Wirtschaftsprfiferordnung, as well as around the role of the WPK in issuing guidelines and regulating the profession. The Stockcorporation Law of 1965 with its limited casuistry of paragraph 164 is severely criticized by Westrick. He points out that this law does not deal with the following issues:21 1. An auditing firm could be auditing a corporation even if a member of a supervisory board of the auditing firm is at the same time also a member of the managing board of a corporation that has a significant influence on a corporation to be audited. 2. A Wirtschaftsprfifer who is a majority or sole stock- holder of a corporation could perform the audit of this corporation providing that the Wirtschaftsprfifer is not considered an enterprise(Unternehmen).22 3. The casuistry of paragraph 164 leaves open the question of whether an auditing firm may audit a corporation if both have the same majority stockholder. 3 4. The casuistry does not deal with the problem of economic client dependency (Kundenabhéingigkeit).24 Westrick admits that even if these loopholes were closed, there would still be many questions left unanswered. He feels that a catch-all clause (Generalklausel) ought to be added to the casuistry. It should be noted that Westrick made these statements in response to the Government Draft (Referentenentwurf) of the 1965 Stockcorporation Law, a long time before final enactment ()f the law. However, his objections were not heeded since essentially no changes were made pertaining to this issue in true final form of the law. Supporters of the current paragraph 164, which include 1116: IdW, felt that due to the severe consequences of violation of 46 paragraph 164 (the audited financial statements would be declared void in such a case), the casuistry should not be extended since the WP is also bound by the professional law which requires the auditor to be independent.25 In contrast, the Stockcorporation Law of 1937 did have something resembling a general clause concerning auditors' inde- pendence in paragraph 137 which excluded the following from perfOrming an audit: a) any member of the board of directors and any employees of the corporation to be audited, b) any member of the board of directors and any employees of a corporation that is dependent on or is dominated by the corporation to be audited, c) any person whose business management (Geschaftsthrung) is significantly influenced by any of the individuals mentioned in (a) or (b).26 Comparing these requirements, especially (b) and (c) with the casuistry of the Stockcorporation Law of 1965, it is obvious that the new law cannot be considered to have strengthened the independence requirements, but for the sake of clarity, it eliminated some of the ambiguity of (b) and eliminated the requirement under (c) entirely.27 The justification for these changes, endorsed by the professional organizations of the Wirtschaftsprfifer, was that the severe consequence of nullification of the financial statements was too strong a measure to be based on anything less than clear- cut guidelines. Furthermore, proponents of the limited casuistry ()f paragraph 164 argued that the professional law (WPO, paragraph 443 and especially paragraph 49) already includes a general clause 47 to cover other auditor-client relationships. Violation of the professional law, in contrast to the corporation law, will not result in nullification of the audited financial statement and thus does not expose a WP to liability claims from the audited corporation for invalid financial statements, but may result in a professional- court proceeding.28 Apparently, this is considered a less severe consequence by the profession's institutions. Considering that the punishment may be more than mere censure--in its most severest furm, expulsion from the WP profession--it seems that the consequences for disregarding the tenets of the WP0 would still be quite sufficient to act as an effective deterrent. Karehnke feels that paragraph 164 of the Stockcorporation Law of 1965 in conjunction with paragraph 49 of the WP0 provides the WP with sufficient guidance.29 Others have serious doubts about the proper interpretation of either regulation.30 Some have argued that paragraph 164 of the Stockcorporation Law of 1965 covers the "more serious" cases where independence in appearance is not given, whereas paragraph 49 of the WP0 deals with the "lighter" cases. However, Adler/Dfiring/Schmaltz point out that this is not a correct interpretation of the law. Other auditor-client relationships, such as close family ties between an auditor and his client may impair independence in appearance, but are more difficult for a third party to recognize. Their threat to independence can only be determined, they assert, by considering the special circumstances surrounding each case.31 Adler/Dfiring/Schmaltz consider the casuistry of paragraph .164 of the Stockcorporation Law of 1965 to be special cases of 48 independence in appearance violations and thus falls simultaneously under paragraph 49 of the WP0. However, they claim that it does not follow that other cases of corporate law (gesellschaftsrechtlicher Art) can be construed by paragraph 49 of the WP0. They believe that paragraph 164 of the Stockcorporation Law of 1965 exhausts this type of auditor-client relationships.32 This somewhat surprising conclusion can only be understood if it is intended to refer to the fact, using Wfistemann's thoughts on the matter, that there are no other auditor-client relationships that lead to nullification of the audited financial statements, even if lack of independence can be proven.33 The WPK voiced its position when discussing Schruff's study which dealt to a significant degree with ownership identities of Wirtschaftsprfifungsgesellschaften and their clients. In his study, Schruff disclosed a number of actual cases in which auditing firms (mostly those organized as an Aktiengesellschaft) and their clients were owned to various degrees by the same entity. It seems logical to question such relationships, unthinkable to any U.S. auditor, as to a possible impairment of independence in appearance. However, the WPK concluded that the relationships disclosed by Schruff do not exceed the limits of the casuistry in paragraph 164 of the Stockcorporation Law of 1965. With this interpretation, the WPK agreed with Adler/Dfiring/Schmaltz that paragraph 164 is a lex specialis, thus prohibiting simultaneous application of paragraph 49 of the WP0, which is considered a llex.generalis, by implication.34 Realizing that a legal definition of the relationship between 49 paragraph 49 of the WP0, a professional law, and paragraph 164 of the Stockcorporation Law of 1965 has not been established, the WPK indicated that it will follow closely any developments in court cases and in Commentaries of professional and corporate law rulings which concern the auditor and his selection process.35 The Wirtschaftsprfiferordnung is also criticized for being less effective than is sometimes claimed by various proponents of the status quo, since this professional law, especially paragraphs 43 and 49, is left to the interpretation of each WP and/or auditing firm. Kicherer complains that there is no competent and neutral authority which could decide in a particular case when an auditor should not be considered independent. He believes that the regular courts are neutral but lack competency, whereas the Institut der Wirtschaftsprfifer and the Wirtschaftsprfiferkammer are competent but cannot be considered neutral since they are dominated by the WP5 themselves.36 Thus, the problem, as Kicherer sees it, lies exactly in the unsatisfactory interpretation of paragraph 49 of the WP0.37 It could be concluded that at the heart of the independence problem is the fact that the individual WPs or auditing firms are left to their own interpretation of what constitutes a relationship in which the auditor is considered to be independent in appearance and what relationship is prohibited. However, it could be argued that the WPK's Directives represent guidelines to help the auditor in this dilemma. Wfistemann comments, though, that the WPK goes from the premise that the auditor is able to recognize when his independence in appearance is impaired. 50 This is reflected in the way the Directives are worded. They do not contain any mandatory edicts (Musserwartungen), and could be deviated from, thus making a successful professional court proceeding rather uncertain.38 Solutions Suggested in the German Accounting Literature The German accounting literature is rife with suggestions for strengthening the independence of Wirtschaftsprfifer. As discussed above, many have criticized the present conditions; however, most critics not only criticize but also make suggestions of how to improve the situation. Even though it is apparent to most of these critics that achievement of perfection concerning auditors' independence is practically impossible, it is felt that certain changes would result in greater credibility of the auditor's work and of the WP profession as a whole. The major suggestions will be discussed by dichotomizing them into proposals involving structural changes of the WP profession and those that could be implemented within the current structure. This dichotomy is only employed to facilitate the discussion. It is not intended for any other purpose. Proposals Involving Structural Changes of the WP Profession Time and again, the suggestion is made for the establishment OfEHlSEC type federal government agency (Aktienamt).39 It is argued that an Aktienamt in charge of ensuring auditors' inde- pendence is the best way to deal with the independence problem.4O 51 However, views differ as to the degree of responsibility and power the proposed government agency should be granted. At one end of the spectrum, the moderate view would like to see the Aktienamt function along lines similar to that of the Securities and Exchange Commission in the United States. At the other end of the spectrum, the extreme position calls for a govern- ment agency to take over the audit function entirely, having government employees perform all mandatory audits. In the middle of the spectrum are those proponents ofznisEC type government agency having the additional responsibility of assigning auditors to audits and/or even paying the audit fees directly to each auditor. Opponents to the idea of government intervention, no matter .how little, do not believe that this would solve all the inde- pendence problems, nor do they believe that such a drastic step is warranted. Schulze-Osterloh is convinced that an Aktienamt (along SEC lines) would significantly change the structure of the accounting profession.41 Leffson, usually quite critical of the present status of the WP profession, also thinks that, for the time being, an Aktienamt is not called for. He states that the WP0 has given the profession the right and the privilege to govern and control itself. As long as the profession carries out these duties conscientiously, there is no need to have an Aktienamt as an additional governmental watch-dog. However, if the profession does not do so, Leffson warns, the creation of such a government agency will become unavoidable. It is up to the WP profession, he asserts, to counteract the widespread suspicion that the 52 profession's self-regulating effort has not been vigorous enough.42 Westrick also thinks that such a drastic measure is unwarranted, especially since the reasons for the current credibility gap by the public have their roots in the Stockcorporation Law itself, since it has no provisions to secure auditors' independence in many situations. He asserts that having the Federal Government take over the audit function is a harsh verdict of distrust against the WP profession and could not possibly be pronounced any stronger.43 Another proposal to strengthen the credibility of the auditing profession is discontinuing the practice of having non-WPs hold a financial interest in auditing firms, as well as disallowing ownership of one auditing firm by another auditing firm.44 Germany seems to be unique among the Common Market countries in allowing persons or entities outside of the accounting profession to hold an ownership interest in auditing firms. That this practice casts a shadow on the entire profession's integrity and independence cannot seriously be refuted. In light of Schruff's research which discloses the relationships between stockholders of Wirtschaftsprfifungsgesellschaften (WPGs) and stockholders of their clients, it seems difficult to understand that such situations still exist.45 The defense that these relationships are not considered improper, according to the Stockcorporation Law of 1965, and thus don't impair independence in appearance, is unconvincing. Most of the larger WPGs that have outside stockholders are partially or fully owned by commercial banks and/or the government. It is true that the auditing function was first performed by banks 53 who founded the first auditing firms to assure themselves of the financial position of certain business entities, but the argument and justification, that the practice has a historical basis is too simplistic.46 Wfistemann questions the motives of any outside entity that invests in a WPG. It could be for valid investment reasons. However, it should be noted that the profit motive is not permitted to be a primary goal of a WPG. Is it, Wfistemann argues, that these investors want to assure themselves that the WPG stays independent and impartial, implying that this cannot be achieved with ownership by others? Turning this argument around,their ownership similarly would instill doubts by others regarding their auditors' independence. A third reason for ownership in a WPG, Wfistemann speculates, may be to control the WPG, an effort that de lege lata is prohibited.47 Proposals Not Involving Structural Changes of the WP Profession The practice of the auditee essentially electing the auditor has long been regarded as an anomaly. Schmalenbach, in 1949, wrote that having a corporation elect its own auditors is an absurdity, since it is not common practice in life to leave the selection of the examiner to the person that needs to be judged independently.48 Those who do not advocate a government agency selecting the auditor, propose, as an alternative, to increase the period of auditor election to more than one year. Some consider election for three to six years to give management less power over the auditor.49 Even though German corporations (Aktiengesellschaften) 54 rarely change their auditors, it is felt that election for several years at a time is still desirable. Richter believes that knowledge of this practice of infrequent auditors' changeover is not as effective in giving encouragement to the auditor for a clear presentation of his audit findings as auditors' election for a multi-year period.50 It should be recalled that for mandatory audits the auditor is elected by the stockholders at the annual stockholders' meeting. However, this election process, as Richter notes, is considered a preprogrammed formal ritual. There are no known cases in which stockholders rejected the proposed auditors (not counting those cases where there was an interim change in the majority stockholder identity).51 Broadening Auditors' Liability Under present German law a WP is generally only liable to a third party if this third party, for instance a stockholder, relied on incorrect financial statements and suffered a financial loss from any decision made, and if the auditor has performed his duties in such a way as to purposely misrepresent given facts.52 Various authors have suggested broadening the liability of auditors to third parties to allow a third party liability which makes an auditor vulnerable to litigation if he was negligent (fahrlassig) in performing his duties.53 Others want to increase the present limited liability of DM 500,000 per case to, perhaps, unlimited liability;54 Westrick considers a broadened third party liability a powerful 55 tool to ensure independence.SS However, others question the effectiveness of such a change in liability. Schulze-Osterloh believes that facilitating third party suits by making an auditor liable for negligence will have little effect since the third party must know the details and circumstances, at least in approx- imate terms, which led to the supposedly incorrect audit decision. Without this knowledge the plantiff cannot make any pertinent accusations.56 He also points out that a proper judicial judgment can only be arrived at if the WP is not bound by the standard of secrecy. Schulze-Osterloh feels it is doubtful that the WP is allowed to speak freely under present regulations even if it is to defend himself.57 Others are opposed to extending third party liability because it may invite all kinds of unjustified law suits which would tie up the profession's resources. They point to the increase in liability suits in the U.S., claiming that it did not solve the U.S. profession's problems.58 However, Richter quotes a study by Bedingfield which determined that as a result of the increased law suits involving auditors, certain changes have been made by U.S. accounting firms, especially: better supervision and training of audit personnel, an increase in the audit intensity, and more selectiveness when deciding whether to accept an audit engagement.59 Incompatible Activities It has been estimated that approximately 30 percent of the WP profession's revenue comes from management consulting.60 Even though the WP0 explicitly lists consulting (Beratung) as an 56 activity compatible with the profession, the widespread practice has come under criticism as being a detriment to the profession's credibility. Some consider practically all consulting to be incompatible with the auditor's functions, while others are more concerned with the consulting work for clients that are at the same time also audit clients. A recent empirical study by Richter revealed that more than 70 percent of business journalists surveyed considered management consulting by WPs for their audit clients to impair the auditor's independence because:61 1. WPs audit their own decisions and recommendations, 2. WPs are personally interested in the audit results, especially if their consulting was deficient, 3. WPs can't guard impartially the interests of financial statement users and their own clients at the same time, 4. during the consulting work, close relationships between management and auditors develop, and 5. economic dependency of the auditor is strengthened due to increased revenues from a given client. However, approximately 65 percent of the WP5 questioned did not consider management consulting to infringe upon their independence status since, 1. their professional code requires them to decline engagements which impair their independence, 2. out of self interest, they refuse certain engagements, and - 3. the information gained from consulting more than offsets any possible impairment of independence. It should be noted, that this study was criticized by the WPK, 57 among other things, on the grounds that business journalists are not a good surrogate for users of audited financial statements.62 Extension of the Casuistry and Related Suggestions As noted earlier, the individual WP (and WPG) has relatively few specific and detailed guidelines which help in deciding what constitutes an auditor-client relationship that infringes on auditors' independence in appearance. Wfistemann seems to put the independence problem in proper perspective when he notes that the auditing function is performed by different individuals who must comply to the same measurements and requirements. Therefore, it would be in the spirit of the mandate for auditors' independence, to establish a list of auditor-client relationships which in essence impair the auditor's independence in appearance. He concedes that such a list could subjectively be considered by the parties involved as unjust, nonetheless it would facilitate the independence problem, contribute to uniform handling, and provide legal certainty. Wfistemann points out that for reasons of practicability it is impossible to accomodate each and every concerned party. Nonetheless, he feels that the profession should consider any auditor-client relationship in which the auditing profession itself suspects impairment of independence (Befangenheit) or where lack of independence in appearance is shown. Wfistemann states that to construct such a list, high standards must be used to ensure the auditor's impartiality and credibility.63 Schruff is working along similar lines for a better way to 58 strengthen auditors' independence. Whether independence in appear- ance is impaired in a certain auditor-client relationship depends upon the subjective evaluation of the relationship by the financial statement users (Adressaten). Therefore, he reasons, the refutation of this charge can only be based on conventions which have estab- lished what situations represent a lack of independence in appearance. Such conventions have not been constructed. They must be achieved and arrived at in the accounting literature and need the consensus of all persons concerned. What must be done, urges Schruff, is to establish minimum and maximum limits. The minimum limits should be determined with the help of the materiality principle which is applicable to any type of information dissemination. Any auditor-client relationship that falls under this minimum limit is considered immaterial and consequently, would not affect auditors' independence. The maximum limit that needs to be established would determine that any auditor-client relationship above this limit is, a priori, considered to impair auditors' independence.64 Under Schruff's proposal, an auditor would be guided by definite and specific rules. If he encounters a situation that falls above the maximum limit, he must decline the audit engagement. However, if the relationship lies below the minimum limit, the auditor is considered independent and can accept the engagement, ceteris paribus. If he finds himself in a situation that falls between the two limits he will be allowed to accept the audit engagement, but, as Schruff qualifies, he must disclose the re- lationship so that each individual user of the resulting audited 59 financial statements can form his own opinion of the auditor's independence.6S Schruff feels that these conventions should be established by court rulings.66 It seems that determining the minimum and maximum limits is in essence an empirical question, since it deals solely with the concept of independence in appearance. The premise of Schruff's suggestion is his belief that without the above discussed minimum and maximum limits, it would be necessary to disclose a large variety of auditor-client relationships that may impair independence in appearance. The limits thus are used to classify sensitive auditor-client relationships into those that do not impair auditors' independence and those that do. There is a wide band of situations between the two extremes where the judgment is still out or where opinions are divided. Implications Even though the preceding discussion of the German accounting literature concerning the auditor's independence status was limited to a few main points mentioned in the literature, it nonetheless provides a summary view sufficient to allow the reader to familiar- ize himself with the challenge facing the WP profession. The WPK more often than not has found itself in a position of defending the status quo, claiming that present rules and regulations are sufficient, implying that any of the changes suggested are uncalled for. However, repeated criticism in the literature and the financial press of the status quo, as well as the desire to conform to a higher degree with other countries' 60 independence standards, especially U.S. standards, seem to have weakened the WPK's resistance for change. The latest WPK Directives, issued in December 1977, is the WPK's first step in taking a firm approach by specifically pro- hibiting certain auditor-client relationships. For example, auditors will not be considered independent in a situation in which they own any shares, no matter how few, of their audit clients. This is a significant departure from the WPK Directives of July 1974, in which it was suggested that independence in appearance pgz_be impaired when an auditor has a financial interest in his client.67 This change in wording is a significant departure from the WPK's apparent premise that WPs are able to determine for themselves when their independence in appearance is impaired. There is little doubt that there is a need for more specific guidelines covering independence in appearance. To discourage improprieties by broadening auditors' liability, considered a deterrent, is bound to force some auditors to reconsider their auditor-client relationships more carefully and may possibly result in more resignations from questionable audit engagements. However, in ensuring independence in appearance it is a rather blunt tool, less effective and efficient than other available tools. Independence in appearance is a concept concerned with the collective perceptions of users of financial statements. It is, as Richter notes, an empirical concept (Tatbestand).68 To leave the auditor without comprehensive specific guidelines as to what those perceptions of financial statement users are, is inefficient and unfair to the WP profession. As will be argued in the next 61 section, even under ideal conditions, it is, in general, impossible for all members of the auditing profession to be independent in appearance in every case without specific guidelines. Conceptual Foundation of the Concept of Total Independence As noted in the preceding section, for a WP to be independent he must be independent in fact and in appearance. These two components make up the "Total Independence" concept. Both require- ments are mandated by the WP's professional law (WPO). To achieve this independence, the German auditor is guided by a general rule, paragraph 43 of the WP0 which requires each WP to be independent in fact when performing an audit. To help the WP decide whether a certain auditor-client relationship impairs his independence in appearance, there is a general rule, paragraph 49 of the WP0, which mandates that he must be independent in appearance. In addition to paragraph 49 of the WP0 there is also the limited casuistry of paragraph 164 of the Stockcorporation Law of 1965 which gives specific guidelines for a selected number of situations, and the Directives of the WPK which point out certain types of relationships that may impair independence in appearance but basically leave it to the WP as to how to interpret and apply them to real situations.69 Below it will be argued that a general rule is sufficient to ensure independence in fact, given certain assumptions. However, to assure independence in appearance, a general rule will not be sufficient for all cases, even under the most ideal conditions. 62 Each component that makes up the concept of Total Independence is discussed separately below. Independence in Fact Independence in fact is a concept of an individual auditor's perception. It is generally agreed that there cannot be any objective- ly measurable guidelines that are also operational. It is this component of the Total Independence concept to which the AICPA refers to in the Statement of Auditing_Standards which states that "the possession of intrinsic independence is a matter of personal quality rather than of rules that formulate certain objective tests."7O To ensure independence in fact in all cases, all that is necessary is a general rule such as paragraph 43 of the WP0, man- dating auditors' independence in fact, assuming that all auditors are ethical, i.e., no auditor will accept an audit engagement if he believes he cannot perform his duties objectively and unbiasedly during the audit. Whether this assumption holds is an empirical question that is beyond the scope of this study. However, there is no reason to doubt that the German accounting profession in general consists of highly ethical and professional people. Intentional unethical conduct seems to be the rare exception that occurs in any jprofessional group. To have specific rules detailing every possible auditor- client relationship is an inappropriate tool to ensure auditors' :independence in fact. It is inappropriate because it unduly 63 restricts acceptance of audit engagements in those cases where the individual auditor honestly believes that he can be independent in fact while the specific rules may, a priori, disallow such an auditor-client relationship. Even with a long casuistry and given the above inefficiencies that it will cause, in order to ensure auditors' independence in fact, it is probably impossible to cover all situations. Thus, a general rule would still be required in addition to the casuistry. As noted above, a general rule alone would be sufficient and is most appropriate. However, a general rule is subject to individual interpreation. Since perceptions of a general rule are bound to differ for some persons, different auditors will arrive at different decisions concerning acceptance or rejection of an audit engagement based on the criterion of independence in fact. Thus, the general rule will result in divergent interpretations in many cases. Nonetheless, we will have achieved independence in fact for all auditors, given the original assumption of ethical behavior. Independence in Appearance In contrast to independence in fact, independence in appear- ance is a concept of the collective perceptions of users of financial statements. Under this criterion an auditor must appear to be independent to a third party. Whether the auditor is independent in fact is of no concern under this criterion. Below, independence in appearance will be discussed under two different rules to guide the auditor. First, a general rule 64 will be employed requiring an auditor to be independent in appear- ance, such as paragraph 49 of the WP0, then specific rules will be applied covering each conceivable auditor-client relationship. Scenario A The following assumptions are used: 1. all auditors are guided only by a general rule requiring them to decline any audit engagement which would impair their independence in appearance; 2. a third party representing all users of financial statements is able to make a decision whether, as to all possible auditor-client relationships, they do impair independence in appearance or not; 3. all auditors will decline an audit engagement if their interpretation of the general rule indicates that they are not independent in appearance. Since the auditors do not know any of the specific rules of the third party, they will have to judge individually each situation when confronted with it. Each auditor must decide for himself how he perceives the third-party-rule for the situation at hand. Since each decision is of a dichotomous type, accept or reject the audit engagement, auditors can be categorized into two groups: those that perceive the rules of the third party correctly, Group I, and those that perceive them incorrectly, Group II, (assuming that the situations dealt with were only those where the third party has ruled that the auditor would not be independent in appearance). Group II thus will be violating the independence in appearance requirement, even though ethical behavior of all auditors was assumed. However, Group II, in general, will not know that they violated 65 their code concerning independence in appearance. In a similar future situation they are likely to arrive at the same decision again. Only when the auditor-client relationships are exposed to the public, for example, through bankruptcies of their audit clients, will these relationships be evaluated. The auditor may be surprised to learn that he violated his professional code of ethics concerning the requirement of independence in appearance. Even though an individual auditor's perception of independence in appearance may agree with the third party rules in many instances, common sense would suggest that sooner or later he will violate the rules unknown to him, unless, of course, the third party rules are always less stringent than the individual auditor's perceptions of the third party rules. In such a case the auditor, assuming he is also independent in fact, may decline an audit engagement even though he is not required to. In sum, a general rule will not ensure independence in appear- ance for all situations. It is a sufficient rule only in the extreme (and trivial) case where all auditor-client relationships are considered independent in appearance by the third party. However, in this unlikely case, no rules are needed, general or otherwise. A general rule is inefficient since it may result not only in WPs accepting audit engagements that should not be accepted, but also in rejecting audits that could have been perfbrmed. 66 Scenario 8 Assumption 1 from Scenario A will be changed from a general rule to specific rules that have been determined by the third party. In this case each auditor knows the independence in appearance rules established by the third party for all possible auditor-client relationships. Since ethical behavior of all auditors is assumed, independence in appearance is assured for all audit engagements. In theory at least, the following sufficient conditions are needed to ensure Total Independence, i.e., independence in fact and in appearance: 1. a general rule mandating independence in fact; 2. specific rules covering all auditor-client relationships where independence in appearance is not given; 3. ethical auditor behavior, i.e., auditors will decline any audit engagement which either impairs their independence in fact or independence in appearance, or both, as determined under (1) and (2). These conditions will guarantee Total Independence for the auditing profession. However, to apply this concept in practice may be somewhat difficult. Some of the difficulties will be explored below. Relationship Between Independence in Fact and Independence in Appearance As noted earlier, Total Independence is made up of independence in fact, which is an individual (perception) concept, and inde- pendence in appearance, which is a collective (perceptionJconcept. 67 TABLE 1 Type of Auditor-Client Relationships Total Independence Auditor-Client Independent Independent Relationship in fact in appearance Type A Yes Yes Type B Yes No Type C No No Type D No Yes For an auditor to be independent as required, he must be both.71 Consider Table l, depicting the four different types of auditor-client relationships that may occur. This table will be referred to frequently in the following discussion. If all auditor-client relationships were of Type A or Type C, there would be no need fer specific rules covering independence in appearance. In either type of auditor-client relationship, the auditors' perceptions regarding his independence in fact coincide with the perception of users of financial statements regarding independence in appearance. Having auditors rely on complete specific rules covering independence in appearance would also ensure independence in fact since they both coincide. Either way, if all possible auditor-client relationships were of Type A and Type C, there could not be any problem with the auditor's independence status assuming ethical behavior. Any 68 issue stemming from these types of relationships (actually only Type C) can only be caused by unethical behavior as defined earlier. If all possible relationships were of Type B and Type D, there would be a potential problem by relying on only one component of the Total Independence concept. In a Type D situation, relying solely on independence in appearance rules will not ensure Total Independence. In this situation, reliance must be placed on the auditor's ethical standards to reject the engagement since he is not independent in fact. However, since he appears independent to users of financial statements, they will not know about his status, since independence in fact is an individual auditor perception concept. He could only be judged after the fact, i.e., if it becomes known that he did not make independent or unbiased audit decisions. For a Type B relationship, total independence can be ensured by relying on independence in appearance rules. Without specific independence in appearance rules there is a chance that the individual auditor will misjudge his independence in appearance status since he feels he is independent in fact. It seems that this type of auditor-client relationship would be of greatest concern to the auditing profession. Consequently, to have specific rules to guide each member of the accounting profession with his inde— pendence in appearance status seems to be important. Even if ethical behavior by all members of the auditing profession is assumed, without specific independence in appearance rules, there is the potential of noncompliance with the requirement of Total Independence. 69 FIGURE 1 Type A Type B Type C Type D Not independent in appearance Not independent in fact The four possible auditor-client relationships can also be shown graphically with the help of a Venn diagram as depicted in Figure 1. In sum, in a Type A or C relationship, the auditors' percep- tions of independence in fact and the perception of independence in appearance by financial statement users are identical. Type B represents a relationship in which users of financial statements have a perception of independence that is stricter than the auditors' perceptions of their own independence. In a Type D relationship the opposite is true. Using the Venn diagram, only the area outside both circles represents auditor-client relationships in which the auditor is truly independent. Implications and Summary Remarks In the preceding discussion it was concluded that without specific rules guiding the auditor as to what auditor-client relationships impair independence in appearance, auditors' 70 independence cannot be assured in all cases, even using the most ideal;assumptions. Although it seems unlikely that complete rules of independence in appearance covering every possible auditor-client relationship could be devised, a first step toward this goal is to determine empirically how perceptions of independence in appearance differ between auditors and users of audited financial statements. Using the terminology of Table 1, it seems that specific guidelines are especially needed for Type B relationships. Without specific guidelines covering independence in appearance, the auditor may not reach the proper accept/reject decision concerning a given audit engagement, since he considers himself independent in fact in a Type B relationship. Another conclusion from the discussion is the underlying implication that for Type A and Type C relationships, reliance on only one component of the Total Independence concept would result in Total Independence. However, as long as the auditor knows that he must be both independent in fact and in appearance, he may unnecessarily reject an audit engagement of Type A in the absence of specific independence in appearance rules. It seems that the only auditor—client relationships which are in less need of specific independence in appearance rules are Type C and Type D. Since the auditor considers himself to be not independent in fact he will reject the audit engagement without concern for any independence in appearance rules. As noted in the discussion of the German accounting literature, several authors have suggested attacking the independence problem by extending specific guidelines 71 concerning independence in appearance. Wfistemann and Schruff both suggested this alternative in general terms. Others used a more piecemeal approach, calling for discontinuance of certain auditor- client relationships currently in existence in Germany.72 By dichotomizing the Total Independence concept into inde- pendence in fact and independence in appearance, it was possible to reason that to assure independence in fact, a general rule is most efficient, assuming ethical auditors' behavior. Of course, if ethical behavior cannot be assumed the concept is of no value. Without ethical behavior, the very existence of the entire accounting profession is of no value, once the public becomes aware of this. The very foundation of the auditing profession rests on public trust. It was shown in Chapter Two, and again in Chapter Three, that the German auditing profession lacks extensive specific independence in appearance rules. It is the contention of this study that most of the current criticism stems from the lack of such specific rules. If this criticism is to subside, an extension of the present limited casuistry seems worthwhile so that the credibility of the WP profession can reach the level of public trust it needs to fulfill its function in today's complex society. This research empirically investigates the perception of certain groups of users of financial statements and the perception of WPs as to the auditors' appearance of independence in a variety of different auditor-client relationships to ascertain the degree to which auditors and users of financial statements agree or disagree in these situations. 72 In the following chapter, selected auditor-client relationships, the research design and methodology are discussed. 10. 11. 73 CHAPTER THREE-FOOTNOTES For example, quoting the International Study Group (paragraph 2) "Independence has long been one of the most important attri- butes of the public accounting profession. It is the funda- mental philosophical foundation that makes it possible for persons with diverse interests in the financial statements of a company, such as stockholders, potential stockholders, creditors, governmental agencies, and others, to rely on the opinion of the auditor. Independence has been expected by users of financial statements to the point where auditors recognize it as a primary attribute to be maintained under all circumstances." See Accountants International Study Group, Indgpendence of Auditors (October 1976). Kane, R. L. (ed.), CPA Handbook (New York: The AIA, 1952), Chapter 13, p. 8. American Institute of Certified Public Accountants, Code of Professional Ethics - March 1975 Edition (New York: AICPA, 1975), p. 6. Ibid. Arens, A. A., and Loebbecke, J. K., Auditing} An Intggrated Approach (New Jersey: Prentice Hall, Inc., 1976), p. 34. Gesetz fiber eine Berufsordnung der Wirtschaftsprfifer (Wirt- schaftsprUferordnung)_i.d.F. der Bekanntmachung;der Neufassupg v. November 5, 1975 (Dfisseldorf, IdW-Verlag GmbH, 1976), pp. 32-37. Richter, M., "Die Unabhfingkeit des WirtschaftsprUfers," Universitat des Saarlandes (July 1976), p. 51. Institut der Wirtschaftsprfifer, WP-Handbuch 1977 (Dusseldorf: IdW-Verlag GmbH, 1977), p. 51. Papers presented with subsequent panel discussions are compiled in Busse von Colbe, W., and Lutter, M. (eds.): Wirtschafts- prfifung Heute: Entwicklppg oder Reform? Ein Bochumer Symposium (Wiesbaden: Verlag Dr. Th. Gabler, 1977). Betteridge, H. T. (ed.): Cassell's German 8 English Dictionary (London: Cassel 6 Company Ltd, 1962. Wirtschaftsprfiferkammer, Richtlinien ffir die BerufsausUbung der Wirtschaftsprfifer und vereidigten Buchprflfer (December 1, 1977), p. 7. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 74 Jfickel, G., Die Unabhfingigkeit der Abschluss rfifer bei der Pflichtprfifupg von Aktiepgesellschaften der Effentlichen Hand (Hamburg: R. V. Decker Verlag, G. Schenk GmbH, 1960), p. 38. Richter, M., p. l. Jackel, G., p. 38. Richter, M., pp. 1-3. Wysocki, K. V., Betriebswirtschaftliches Prfifungswesen, Prfifungsordnungen und Prfifungsorgane (Mfinchen: Verlag Franz Vahlen, 1972), p. 131. Ibid., pp. 131-133. Some of the more recent bankruptcies are: Herrstatt Bank, SB-Mehrwert, and Stumm; see Wintermann, J., "Renaissance des Testats," Bbrsen Zeitupg_(April 4, 1977), p. l ff. Knief, P., "Der Wirtschaftsprfifer im Spannungsfeld zwischen gesetzlichem Auftrag und 6ffentlicher Erwartung," Betriebswirtschaftliche Forschupg und Praxis (Heft 2, 1976), pp. 114-119. See also pp. 121-122 for a summary of headlines concerning criticism of the WP profession that were published in newspapers and periodicals in the last few years. For example, the criticism and questions raised by Schruff, L., "Zur Objektivierung des Unabhangigkeitspostulats bei Jahresabschlussprufungen," Betriebswirtschaftliche Forschupggund Praxis (Heft 2, 1976), pp. 140-150; Kicherer, H.-P., "Kummer mit der Unabhangigkeit," Der Volkswirt (Nr. 16, April 18, 1969), pp. 38 ff.; Leffson, U., "Erkenntniswert des Jahresabschlusses und Aussagewert des Bestatigungsvermerks," Die Wirtschaftsprfifupg_(Heft 1/2, 1976), pp. 4-9.; Huppertz, W., "Die widersprfichliche Lage des Wirtschaftsprufers bei der Abschlussprfifung," Blick durch die Wirtschaft - Das Handelsblatt (November 4, 1976), pp. 4-5. Westrick, P. Abschlussprfifupg und Abschlussprfifer nach ggltendem und zukUnftigem Recht (Heidelberg: Verlagsgesellschaft "Recht und Wissenschaft" MBH, 1963), pp. 86-87. This situation is prohibited by the 1977 revision of the WPK's "Richtlinien...", to be effective January 1, 1979. 23. 24. 25. 26. 27. 28. 29. 30. 75 Westrick must be referring to those situations where the Federal government has been a majority stockholder of both the WPG and the auditee. Recent court rulings by the German High Court (Bundesgerichtshof) have established that the Federal government under certain circumstances is considered an enterprise (Unternehmen). In such a case, the casuistry of the Stockcorporation Law of 1965 applies, which implies that this criticism may no longer be valid. However, court rulings have gone beyond the casuistry. The High Court also determined that less than a 50 percent ownership of one entity by another entity could be considered as "affiliated" enterprises (verbundene Unternehmen) if special circumstances suggest a dominating influence of one by the other. See, "Aus der Rechtsprechung," Die Wirtschaftsprfifupg (Heft 3, 1978), pp. 80-84.; and Mfiller, H. P., "Anmerkungen zum Urteil des BGH vom 13. Oktober 1977 fiber die aktienrechtliche Unternehmenseigenschaft von Gebietskbrperschaften," Dig_ Wirtschaftsprfifung_(Heft 3, 1978), pp. 61-67.; also, 'Qufthansalhteil," Die Aktiengesellschaft (Nr. 12, 1975), pp. 330-333. This may also be a problem in the United States that has not been resolved. However, the SEC approved certain rules in June 1978 which will require companies to disclose (l) the percentage of total non-audit service fees to the total annual audit fee, (2) individual non-audit services which have fees greater than three percent of the annual audit fee, (3) all non-audit services provided by the independent auditor. See The CPA Letter (Nr. 13. July 1978), p. 1. See WP-Handbuch 1977, p. 50. This researcher's translation of paragraph 137 of the Stock- corporation Law of 1937 as quoted in; Karehnke, H., "Zur Unabhfingigkeit des Abschlussprfifers," Die Aktienggpellschaft (June 1971), p. 179. The Stockcorporation Law of 1965 eliminated some of the ambiguity of the Stockcorporation Law of 1937 by defining "affiliated enterprises" (verbundene Unternehmen) and uses this term in the casuistry of paragraph 164 of the 1965 law. Kicherer, H.-P., Grundsatzeppdnungsmassiger Abschlussprflfqu (Berlin: Duncker-Humblot, 1970), p. 106. Karehnke, H., p. 179. Kicherer, H.-P., "Zur Unabhangigkeit des Abschlussprfifers", Die Aktiengesellschaft (February 1972), pp. 37-40. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 76 Adler/Dfiring/Schmaltz, Rechnungslegpng und Prfifung der Aktiepggsellschaft - Fourth Edition - Band 2, bearbeitet von: Schmaltz, K.; Forster, K.-H.; Goerdeler, R.; Havermann, H. (Stuttgart: C. E. Poeschel Verlag, 1971), p. 224. Ibid. Wfistemann, G., Probleme der Glaubwfirdigkeit von Abschlussprfifern: Wirtschaftsprfifer und Certified Public Accountant (Frankfurt: Verlag Harri Deutsch, 1975), p. 59. If both, lex specialis and lex generalis cover the same situation, lex specialis takes precedence over any lex generalis. See Leffson, U., "Erkenntniswert des Jahresabschlusses...," pp. 7-8. Mitteilungsblatt der Wirtschaftsprfiferkammer Nr. 67 (April 2, 1976), p. 9. Kicherer, H.-P., "Kummer mit der Unabhfingigkeit," pp. 38-39. Kicherer, H.-P., "Zur Unabhfingigkeit des Abschlussprfifers," p. 38. Wfistemann, G., p. 62. This criticism is somewhat lessened by the WPK's Directives issued in December 1977. In this revision, the WPK does use mandatory edicts regarding two types of auditor-client relationships, namely, direct stock- ownership by a WP in his audit client and maintaining the audit clients books and records. An Aktienamt is a federal government agency whose responsibility would include the supervision and control of activities relating to stock corporations, similar to the function of the SEC in the United States. See Richter, M., Die Sicherung der aktienrechtlichen Publizitat durch ein Aktienamt (K61n: Carl Heymanns Verlag KG, 1975). Schulze-Osterloh, J., "Referat: Stellung und Unabhéngigkeit des W1rtschaftsprfifers," in: Busse von Colbe, W., and Lutter, M. (eds.), p. 112. Leffson, U. in: "Meinungsspiegel," Betriebswirtschaftliche Forschung und Praxis (Heft 2, 1976), p. 219. Westrick, P., p. 83. See Leffson, U., "Erkenntniswert des Jahresabschlusses...," pp. 4-9. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 77 Schruff, L., Der Wirtschaftsprfifer und seine Pflichtprflfungg; mandate (Dusseldorf: IdW Verlag GmbH, 1973). Wustemann, G., pp. 109-110. Ibid. See DUrrhammer, W. W., Unabhfingigkeit des Abschlussprfifers im Aktiengesetz und in der Praxis (Dusseldorf: Handelsblatt GmbH, 1971), p. 38. Richter, M., "Die Stellung des Abschlussprfifers im Entscheidungs- und Kontrollprozess der Aktiengesellschaft," Diskussionsbeitrage - Fachbereich Wirtschaftswissenschaft, Universitfit des Saarlandes (September 1977); also, the proposed 5th Directive of the §§§_recommends that the auditor be elected for at least three years butunot more than six years at a time. See Kaminski, H., "Uberblick fiber die im Jahre 1972 von den Gremien der Europfiischen Gemeinschaften verbffentlichten Richtlinien und Stellungnahmen," Journal UEC (April 1973), pp. 82-88. Richter, M., "Die Stellung des Abschlussprufers...," p. 25. Ibid., p. 6. See Westrick, P., pp. 89-90., and Czech, H. W., "Die Haftung des Wirtschaftsprfifers gegenfiber Dritten," Betriebs-Berater (June 10, 1975), pp. 723-726. For example, Westrick, P., p. 106., and Kicherer, H.-P., "Kummer mit der Unabhangigkeit," p. 42., and Richter, M., Die Sicherungfder aktienrechtlichen Publizitfit..., pp. 186-188, seem to favor a broadened liability to third parties. For example, Emmerich, V., "Die Kontrolle der Kontrolleure," in Busse von Colbe and Lutter, M., p. 226, believes that the present liability could be significantly increased, even though not unlimited, to make it still insurable. Westrick, P., pp. 103-104. Schulze-Osterloh, J., pp. 109-110. Ibid., p. 109. Havermann, H., "Meinungsspiegel," Betriebswirtschaftliche Forschung und Praxis (Heft 2, 1976), pp. 213-216. Bedingfield, J., "Effect on recent litigation on Audit Practice," Journal of Accountancy (May 1974), pp. 55-62. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 78 Per conversation of this researcher with Mr. Kaminski, Secretary (Geschaftsffihrer) of the IdW, on December 12, 1977. See, "Reaktion mit Emotion," Wirtschaftswoche (Nr. 29, 1976), pp. 42-43. See Thfimmel, M., "Dr. Richters Fragebogen," Leserbriefe, Handelsblatt (June 26, 1976), p. 9., and Richter, M. "Ergebnisbericht fiber die schriftliche Befragung zur Unabhfingigkeit des Wirtschaftsprfifers," Unpublished Summary (June 16, 1976), pp. 3-5. Wfistemann, G., pp. 62-63. Schruff, L., "Zur Objektivierung des Unabhfingigkeitspostulats...," pp. 145-150. Ibid., p. 150. An example of such a situation is the recently enacted disclosure requirement by the SEC as described in Footnote 24. Schruff, L., "Zur Objektivierung des Unabhfingigkeitspostulats...," p. 149. Wirtschaftsprfiferkammer, Richtlinien ffir die Berufsausfibung. der Wirtschaftsprfifer und vereidigten Buchprfifer (July 1974). Richter, M., "Diskussionsbeitrag zum Referat: Stellung und Unabhfingigkeit des Wirtschaftsprfifers," von J. Schulze- Osterloh, in: Busse von Colbe, W. and Lutter, M. (eds.), p. 129. See Wirtschaftsprfiferordnung, pars. 43 and 49.; Juenger, F. K. and Schmidt, L. (translators), German Stock Corporation ‘Agp (KBln, Chicago: Verlag Otto Schmidt KG - Commerce Clearing House, Inc., 1967), par. 164.; Wirtschaftsprfiferkammer, Richtlinien... (1977), pp. 7-9. American Institute of Certified Public Accountants, Statements of AuditingStandards No. 1 (New York: AICPA, 1972), para- graph 220.03. This requirement exists for WPs and CPAs alike. See Leffson, U., "Erkenntniswert des Jahresabschlusses...," pp. 4-9. CHAPTER FOUR RESEARCH DESIGN AND METHODOLOGY The objective of this study is to investigate the perceptions of Wirtschaftsprfifer and two groups of financial statement users concerning the appearance of independence of German auditors for selected auditor-client relationships.1 In this chapter the research design and methodology that is used to examine empir- ically the appearance of WPs' independence are discussed. The discussion is divided into five sections: 1. Types of auditor-client relationships investigated 2. Research medium employed 3. Target groups selected 4. Participation of target groups 5. Hypotheses and statistical tests Types of Auditor-Client Relationships Investigated There is, no doubt, a very large number of potential or actual auditor-client relationships in which the auditors' appear- ance of independence could be questioned. Any investigation in this area must of necessity be limited either to a representative sample of these questionable auditor-client relationships and/or to a nucleus of the more pressing problem-relationships facing 79 80 the auditing profession today. A convenient tool to discuss questionable (or potentially questionable) auditor-client relation- ships is to categorize them into a manageable number of groups. As mentioned in the preceding chapter, Wysocki was able to condense all types of auditor-client relationships into only two main groups. However, for this discussion, the following categorization is employed which is used in the U.S. literature and, to some degree, also in the German accounting literature:2 1. Financial interest (direct and indirect) 2. Bookkeeping and electronic data processing (EDP) services 3. Family relationships 4. Occupations with conflicting interest 5. Business and other similar relationships The significance of each category is discussed briefly below, and where appropriate, a comparison between U.S. and German accounting practice is made. Financial Interest (direct and indirect) The U.S. auditor is provided with very definite guidelines as to what relationships would render him not independent in appearance concerning financial interest in an audit client. Both the SEC and the AICPA prohibit an auditor to have any direct financial interest and any material indirect financial interest in audit clients.3 The debate as to what constitutes a material indirect financial interest is still ongoing in the United States, mainly because the concept of materiality has not been sufficiently researched to develop definite guidelines.4 However, there is 81 little doubt that current AICPA and SEC rules greatly assist the auditor in deciding whether to accept or reject an audit engagement for this type of auditor-client relationship. The German auditor has less guidance in this matter. No specific rules are currently effective concerning this type of situation. The Stockcorporation Law of 1965 avoids this issue completely and the Wirtschaftsprfiferordnung does not directly deal with it. The Directives of the Wirtschaftsprfiferkammer (WPK), however, do contain an admonition that this type of situation p§y_possibly impair independence in appearance.5 This, of course, is not a definite prohibition. A case in point is Niehus' thought on this matter when he notes that "...conspicuously absent from the code [WPO] is the express rule that the Wirtschaftsprfifer may not own any shares in his client company. This in no way means that he may be a shareholder or in any other way related to his client company. This follows from the overriding rule of independence, which in its final analysis is a state of mind."6 Nonetheless, the WPK in the December 1977 revision of its Directives took the view that any direct ownership of client shares by WPs will be considered to impair independence in appear- ance and thus will be expressly forbidden, effective January 1, 1979.7 Even though the Directives are usually effective when published, the WPK felt it necessary to give those who owned client stocks sufficient time to dispose of them. Apparently, they assumed that a number of WPs do indeed own shares of their audit clients. As an aside, it may be of interest to point out 82 that concealment of stock ownership is relatively simple since the practice of issuing bearer shares is quite common in Germany.8 It should also be noted that the new rule regarding stock ownership of client shares covers only those clients that are audited by the WP (or the auditing firm or auditing group with which he is associated). The rule does not apply to ownership of companies not audited by the WP even though their parent or 9 a subsidiary may be audited by him. Thus it applies only to a direct financial interest with direct being defined in the most limited possible sense.10 Another issue concerning financial interest that has been in the limelight in recent years is the ownership of auditing firms and some of their client firms by the same stockholders. The government, at the Federal as well as at the regional level, and some of the larger banks have been the worst offenders of this practice.11 So far, the WPK has taken the position that under current law and regulations simultaneous ownership of WPGs and their audit clients is allowed as long as it does not exceed 50 percent of shares outstanding.12 However, this interpretation has been challenged by various authors as well as by recent court decisions.13 Bookkeeping and EDP Services To provide bookkeeping or accounting assistance to audit clients has been a time honored practice for auditors in Germany as well as in the United States. The AICPA recognizes this and thus far has not considered this practice, even if extensive, 83 to impair the auditors' independence in appearance.14 The SEC, on the other hand, considers the appearance of the auditors' independence to be impaired in such a case.15 The WPK's Directives are the only authoritative source for the German auditor that deals with this type of auditor-client relationship. Until the December 1977 revision, the Directives expressly permitted an auditor to assist in the preparation of the financial statements. This activity per se was not considered to impair the auditor's independence in appearance. However, the WPK added the caveat that independence in appearance p§y_be impaired if the auditor has to pass judgment on audit evidence that has been substantially created by the auditor himself.16 This has been interpreted by some to mean that doing in effect the entire bookkeeping for a client does impair the auditor's independence in appearance.17 The latest revision of the Directives, however, is more specific. It explicitly prohibits a WP from performing the audit if he has prepared (or substantially prepared) the financial statements of his audit client.18 This represents a major change in the WPK's philosophy toward taking a clear stand on certain independence issues, as it did on direct financial interest. It is a departure from past Directives which merely pointed out sensitive situations which pay or $2219 impair auditors' independence but left the auditor with no firm guidance. Even with these more explicit guidelines, it is of interest to determine how this issue is viewed by WPs and users of financial statements; whether these groups are in general agreement with the rule as well as what their 111‘ 1.. ‘11-...‘It1J pl. iii-.1 84 perceptions are of this type of situation for selected auditor- client relationships. Family Relationships In general, the U.S. auditor is not considered to be inde- pendent if a close family member serves in an executive position in a client firm and is involved in financial decision making. The positions of the AICPA and the SEC agree in general terms. Several specific rulings exist to guide the U.S. auditor in deciding whether to accept an audit engagement or not.19 The German auditor, though, has no specific rules covering situations where a close relative of an auditor is a leading employee of an audit client. The Directives of the WPK do mention, however, that a close family relationship between an auditor and an executive of an audit client company may impair independence in appearance.20 ~Whether it does or not is left to the individual WP or WPG to decide. This study's purpose is also to provide empirical evidence concerning the degree to which certain family relationships are perceived to impair independence in appearance by WPs and important financial statement user groups. Occupations with Conflicting Interest It seems that all occupations that do not have as their ob- jective the element of impartial judgment are, a priori, incom- patible with the audit function. The U.S. auditor is restrained from performing certain services for an audit client. For example, 85 the SEC has concluded that a CPA will not be independent in appearance if he acts as counsel, broker-dealer, or actively engages in direct competition in a commercial enterprise with an audit client.21 The AICPA has a similar view on this issue. However, any CPA can engage in any kind of legal activity or pro- fession without losing his CPA certificate as long as he does not engage in audit work that may be conflicting with his non- auditing activities. In Germany, any activity that is not considered compatible with the status of the WP profession is prohibited, no matter 22 Violation how it relates to any audit engagements, if at all. of this rule may result in the loss of the WP title. The major purpose of this rule is not necessarily to strengthen the auditors' independence status EEILEE; but to enhance and maintain the reputation of the auditing establishment as a profession (freier Beruf) and the reputation of WPs as professionals. Thus management consulting and legal counseling (especially if the WP also has a law degree) are explicitly considered compatible occupations and are officially sanctioned. There is some question, however, as to the kind of activity that falls under management consulting (Unternehmensberatung).23 Similarly, it could be questioned whether the function of general counsel performed by the auditor still is compatible if performed for an audit client. Business and Other Similar Relationships The U.S. auditor in general is prohibited from maintaining any kind of close business relationship with his audit clients. 86 Both the AICPA and the SEC agree that this would impair the auditor's independence status.24 The WPK in its Directives also warns that a close business relationship with a leading client employee may impair the auditor's appearance of independence.25 Certain other auditor-client re- lationships have also come under closer scrutiny in the German accounting literature and the financial press. Two of special note are economic client dependency (Kundenabhfingigkeit) and membership on Supervisory Boards of corporations related in some way to an audit client corporation. Whereas the former type of relationship has also been discussed extensively in the U.S. accounting literature, the latter type does not per se apply to 26 the U.S. business environment. Each type is discussed separately below. Economic Client Dependency The reason that the SEC has not made a specific ruling on this issue may be partially explained by the fact that usually only large accounting firms have SEC clients and thus fall under SEC jurisdiction. There is very little chance that any one of the audit fees and/or consulting fees received from one client account for more than a small part of total revenue of any given accounting firm.27 Some authors in the German accounting literature have called for definite percentage rules, since it is felt that the appearance of an auditor's independence is impaired if an auditing firm derives a major portion of its total revenue from one audit client.28 87 British auditors, for example, are advised by the Joint Committee of the Institutes of Chartered Accountants in Epgland, Wales, Scotland and Ireland that any member of their institute "should make sure that the fees received from any one client or group of associated clients do not exceed 15 percent of his total fee income.”29 The WPK in the 1977 revision of its Directives acknowledges that a WP who receives a significant portion of his total income from one audit client ppz_impair his independence. However, the WPK falls short of setting specific limits, implying that each situation must be considered on its own merits. Wirtschaftsprfifer on Supervisory Boards Prior to the issuance of the December 1977 revision of the WPK's Directives, the only authoritative source dealing with the propriety of WPs sitting on Supervisory Boards of corporations was the limited casuistry of paragraph 164 of the Stockcorporation Law of 1965.30 In one of the most publicized recent bankruptcies of a German enterprise, the Herrstatt Bank, it was disclosed that the leading member of the accounting firm that audited Herrstatt Bank was also a member of the Supervisory Board of the Gerling Global Bank, an affiliate of Herrstatt Bank.31 However, a judicial/ professional investigation requested by the auditor himself resulted in dismissal of any charges because it was ruled that the circum- stances did not violate paragraph 164 of the Stockcorporation Law of 1965 and that the auditor had not violated (intentionally 88 or by neglect) paragraph 49 of the WP0.32 Nonetheless, the Herrstatt Bank bankruptcy did strike a chord with the WPK since, in the same issue of the Mitteilungsblatt der Wirtschaft§prUferkammer that publicized the acquittal of all charges against the auditor of Herrstatt Bank, the WP profession was advised to exercise due judgment when considering a position on a Supervisory Board even if the position would not per se violate Stockcorporation Law.33 The WPK also discusses this issue in its December 1977 Directives. For the first time, the Directives forbid WPs from holding memberships on Supervisory Boards already prohibited by the Stockcorporation Law of 1965. However, the Directives go beyond the casuistry of paragraph 164 of the Stockcorporation Law of 1965 when voicing reservations concerning the situation where an auditor is a member of the Supervisory Board of a company which, though not a related enterprise as defined by corporate law,34 is connected to the audit client company on a financial or other basis.35 What these financial or other connections are is left to the interpretation of the individual WP or WPG. It should be noted that this new rule does not become effective until January 1, 1979 to allow affected WPs to resign either their Supervisory Board posts or certain audit engagements. 89 Criteria for the Selection Process of Chosen Auditor-Client Relationships This study investigates selected auditor-client relationships covering the five types of situations discussed above. To maximize the potential benefit of this research, situations were selected that are of interest not only to the German WP profession but to the U.S. accounting profession as well. Auditor-client relation- ships that were not of importance to the U.S. profession were included in the study only if they were of major importance to the German WP profession. Seventeen different situations were selected using this criterion. Since a number of situations con- sisted of several separate auditor-client relationships, the total number of situations investigated were twenty-seven. Ten of the situations selected were taken from Lavin's questionnaire.36 Lavin conducted an empirical study in 1973 concerning U.S. CPAs and U.S. users of financial statements about their perceptions of auditors' independence. Twelve separate auditor-client relation- ships from Accounting Series Release (ASR) 126 were selected by Lavin on which both the AICPA and the SEC have taken a position concerning their interpretation of the described auditors' inde- pendence status. Since the SEC and the AICPA do differ on some of the independence issues, even though both supposingly base their rulings on third party perceptions of independence in appearance, Lavin wanted to gather empirical support for either one (or none) of the positions. Questions two and twelve of Lavin's questionnaire were deleted from this study since they were considered nonapplicable 90 to the German environment. The remaining ten situations chosen from Lavin's study are of importance to the German WP profession. To replace them with ten different situations would not have improved the relevance of this study. Including these ten situations in the present study allows a comparison of the results with Lavin's results, including some interesting findings that may support either the AICPA or SEC position on certain issues. Of course, perceptions may change over time, and the time lag between Lavin's research and this study may confound the comparison between CPAs' perceptions on independence and those obtained from WPs. However, the SEC issued ASR 234 in December 1977, to update prior rules on auditors' independence, particularly ASR 126, issued in 1972. It seems that the SEC's view of what constitutes an independent auditor-client relationship has not changed significantly between 1972 and 1977. Research Medium Employed There are basically two methods of data collection available for survey research. They are, (a) personal interview and (b) mail questionnaire. Each method has some advantages over the other. The major advantage of a personal interview is that the researcher can be assured that the subject selected in the sample is indeed answering the questions. The interviewer can also call in advance to arrange the interview at a convenient time for the respondent so that nonresponses can be minimized. In addition, the researcher can be assured that all questions will be answered.37 91 The major advantage of a mail questionnaire is that a large number of people can be reached at a reasonable cost, allowing fer a relatively large sample size. In addition, since each subject in the sample receivesexactly the same information, the responses are not confounded by possible interviewer's bias. A mail questionnaire was employed for this study because the questions presented are concise and relatively easy to comprehend. There was also no reason to believe, a priori, that persons other than those approached would respond to the questionnaire, since the type of questions asked and the subject under study are of importance to the persons in the sample. The Questionnaire The questionnaire included a set of instructions explaining the questionnaire and gave a definition of auditors' independence pointing out that an auditor must not only be able to make objective and unbiased audit decisions but must also appear to be independent. (See Appendix A, B, and C for sample questionnaires.) The main body consisted of 27 separate situations of auditor- client relationships that were to be answered with a "Yes"/"No" response, i.e., "Independent"/"Not Independent". For questionnaires sent to users of financial statements, each respondent was also asked to indicate how each situation presented would affect his financial decision, using a five-point Likert-type scale response. A very limited section was devoted to some background information on the respondent and space for additional comments. Each questionnaire was accompanied by a cover letter signed 92 by the Chairman of the Department of Accounting and Financial Administration at Michigan State University. The cover letter and the questionnaire were in German. (See Appendix A, B, and C for sample of cover letters.) It was felt that an English language questionnaire might cause some people to think that the situations described were not applicable to Germany. The possibility that a number of sample subjects might not have responded or might have responded improperly because they were not sufficiently fluent in English was also considered a factor. The situations selected from Lavin's questionnaire were translated into German and certain words and expressions were translated to convey the spirit rather than the word.38 Minor changes were made in the German translation.39 Verification of the Questionnaire Design The form of the questionnaire closely followed the design of Lavin's questionnaire. Lavin pretested his questionnaire extensively which resulted in some revisions to the final questionnaire. Written permission was obtained from Dr. Lavin to use his results in this study. Dr. Lavin did not indicate any problem with his questionnaire design. Even though this questionnaire addressed an audience similar to Lavin's, extra care was taken in the translation. The validity of the translation as well as appropriate usage of German terms was verified as follows: the initial German version of the questionnaire was reviewed by a member of the Department of German and Russian at Michigan State University and necessary modifications 93 were made. The questionnaire was then reviewed by a prominent German Wirtschaftsprfifer who is also affiliated with one of the "Big Eight" accounting firms. In addition, two more German account- ing professionals also reviewed the questionnaire in detail. Suggestions made were incorporated and resulted in certain changes in wording and terms as well as the addition of three more questions to the preliminary questionnaire. It was felt that this procedure provided reasonable assurance that the design of the questionnaire and the questions asked were appropriate. Even though extensive field testing on a larger sample of German respondents is theoretically a preferred practice, this was not done in order to minimize biased responses. Since the WP profession is a relatively small group, mailing a pilot questionnaire to a larger sample of WPs far in advance of the mailing of the final questionnaire may have resulted in either: a) group responses rather than responses of individual perceptions, or b) no responses due to a possible negative influence by the professional organizations. Although either consequence could also have occurred without the mailing of a pilot questionnaire, it was felt that having no preliminary mailing would result in an acceptable response rate before any interference by the professional organizations could take effect. A case in point is Richter's research in 1975, which consisted of a mail survey concerning certain groups' perceptions of WPs 4O performing management consulting services for their audit clients. The professional organizations, apparently fearing negative 94 repercussions to the WP profession, interfered with his research by mailing two separate letters to all WPs noting that they had serious reservations about Richter's research and thus did not endorse it.41 According to Richter, no more questionnaires from WPs were returned to him after this. However, he had already received a somewhat satisfactory response rate before these letters were received by WPs. Whether Richter would have received many more responses without this interference by the WPK and IdW is debatable. For the same reason, this researcher did not schedule an interview with representatives from the IdW and the WPK until the first mailing of the questionnaire was sent out. However, during the December 12, 1977 meeting with Mr. Kaminski from the IdW and Mr. Pfefferer from the WPK, the questionnaire was discussed in detail and no objections were raised as to the pro- priety of the research subject and methodology.42 Any inquiries to the IdW and/or WPK by sample subjects concerning this research were responded to neutrally by these professional organizations.43 However, a number of WPs apparently did request an inter- pretation from the WPK of how current regulations could be interpreted in answering the questionnaire.44 Two questionnaires were received that were not individually answered but had the WPK's interpretation attached as a substitute for their responses. Since the objective of this study is to ascertain individual perceptions of auditors' appearance of independence, these questionnaires were not included in the tabulation of the results. 95 Target Groups Selected As noted earlier, the study focuses on auditors' independence in appearance as perceived by WPs and users of financial statements audited by WPs. Wirtschaftsprfifer Sample To obtain a representative sample of WPs, 380 WPs were randomly selected from the most current WP-directory (1976/77 WP-Verzeichnis), which lists all WPs licensed to practice as of December 1, 1976. An additional 40 WPs were randomly selected from those WPs that were listed as belonging to one of the "Big Eight" international accounting firms, to provide additional responses from this group for use in various comparisons. Users of Financial Statements In the German accounting literature users of financial state- ments are sometimes identified as investors, creditors, and employees of the audited firm as well as the public in general.45 In U.S. accounting research, financial analysts and bank loan officers are frequently used to represent investors' and creditors' groups. Actual stockholders are used less frequently to represent the investor group apparently because of the difficulty in obtain- ing a sample and the possibility of a very low response rate.46 Richter used journalists of the German financial press as a user group of financial statements.47 He considered them to be an important user group since they are also opinion leaders (Meinungsmultiplikatoren). However, the WPK criticized this selection as being slanted in representing all users of financial statements.48 96 In this study leading bank officers of the larger banking institutions in Germany were used to represent financial statement users. Directors of investment departments (Leiter der Wert- papierabteilung - LWPs) and directors of loan departments (Leiter der Kreditabteilung - LKRs), were chosen to represent the investors' and creditors' point of view. Financial analysts in brokerage firms such as exist in the United States are not common in Germany. A German resident contemplating to purchase stocks of German corporations would call his banker, just as his U.S. counterpart would call his stockbroker. Leading bank officers of the larger banks were considered, a priori, to represent a well-informed and important user group of audited financial statements. Even though there are over 6,000 banks located in Germany with over 37,000 branches,49 it was felt that a random selection would be inappropriate because it would include too many smaller banks which not only are less likely to use audited financial statements to any great extent to make loan decisions, but also are less likely to deal with common stock securities. Thus a nonrandom selection was performed as follows: using the Rand McNally International Bankers Directory, Final 1976 Edition, all banks in the 12 largest cities in Germany having over 500 million Deutsche Mark in assets were selected. Since there are a few very large banks that have branches many times the size of small and medium banks, the branches of four of those "mammoth" banks (Grossbanken) in each of the selected cities were included in the sample as well. Also included in the sample were 12 subsidiaries of foreign banks located in Germany (8 U.S. 97 banks, and one bank each from the Netherlands, France, England, and Japan). A total of 110 different banks (including the foreign banks) and 44 branches were selected.50 One questionnaire was sent to the director of the investment department (LWP) and one questionnaire was sent to the director of the loan department (LKR) of each of the banks and branch banks selected. Since the names of the sample subjects were not readily available, the questionnaires were mailed to the Lgi£g£_ der Wertpapierabteilung and to the Leiter der Kreditabteilung of each bank in the sample. Participation of Target Groups The questionnaires were mailed to the sample subjects from Germany on November 25, 1977. A stamped, self-addressed return envelope to this researcher's temporary German address were included. The return envelopes were numbered for identification purposes. A follow-up mailing which included a second request to reply, another copy of the questionnaire and another self- addressed return envelope was sent on December 16, 1977 to those that had not responded as of that date. Responses received as of March 15, 1978, are included in the study. Most responses were received prior to January 1, 1978. Eighty-six percent of the responses from LWPs, 93 percent from LKRs and 87 percent of the responses from WPs were received prior to January 1, 1978. As Tables 2, 3, and 4 indicate, the rate of responses were as follows: WPs, for the general sample, 35 percent; for LKRs 98 63.6 percent for main offices, and 22.7 percent for branch banks; for LWPs 40 percent for main offices, and a zero response rate for branch banks. However, due to nonusable responses, the responses that could be used in the final tabulations were 28.4 percent for WPs, 44.5 percent for LKRs in main offices,and 28.2 percent for LWPs in main offices. Bank branch offices had a rate of usable responses for LKRs of 13.6 percent and a zero response rate for LWPs. The sub-sample for "Big Eight" WPs had a 25 percent response rate with a usable response rate of 20 percent. The lower response rate of usable responses for LKRs from branch banks as compared to LKRs from main offices was 13.6 percent and 44.5 percent, respectively. This may be explained partially by the fact that the LKRs of branch offices might have thought that the questionnaire did not apply to them since they belonged to a branch bank. The possibility cannot be ruled out that interest in this research is of lesser interest to branch LKRs than to LKRs in main offices due possibly to the different types of loans granted which require less involvement with audited financial statements. The zero response of LWPs of branch offices may be explained as follows: a) Investment decisions are more centralized and may not be made at the branch level at all. b) One of the main offices of the four "mammoth" banks declined to participate and may have informed the branches. c) Another of these four banks completed the questionnaire at the main office but indicated that they did not appreciate that "leading men in various branches of their bank had also received questionnaires." Apparently they thought that one questionnaire per bank was sufficient. 99 TABLE 2 Participation by Wirtschaftsprfifer (WPs) General Additional Sample "Big Eight" WPs # % # % Sample subjects 380 100.0 40 100.0 Responses received 133 35.0 10 25.0 Nonusable responses 25 6.6 2 5.0 Usable responses 108 28.4 8 20.0 TABLE 3 Participation by Directors of Loan Departments (LKRs) Main Office Branch Office # % # % Sample subjects 110 100.0 44 100.0 Responses Received 70 63.6 10 22.7 Nonusable responses 21 19.1 4 9.1 Usable responses 49 44.5 6 13.6 TABLE 4 Participation by Directors of Investment Departments (LWPs) Main Office Branch Office # % # % Sample subjects 110 110.00 44 100.0 Responses received 44 40.0 0 0.0 Nonusable responses 13 11.8 0 0.0 Usable responses 31 28.2 0 0.0 100 d) It is possible that because so few, if any, investment decisions are made at the branch level, the auditors' independence may simply be taken as given. This attitude was even stated in some of the nonusable responses of bank officers of non-branch banks. Nonusable Responses Since there is a relatively large proportion of nonusable responses among all three sample groups, it is appropriate to analyze these. Tables 5, 6, and 7 summarize the reasons stated by the sample subjects for not completing the questionnaire as requested. As these tables show, the reasons for not completing the questionnaire vary. Of the WP3 that returned the questionnaire incomplete, 40.7 percent indicated that they were either retired (18.5 percent), had no time to spare (11.1 percent) or could not answer the questions with a simple yes or no (11.1 percent). For LKRs, 68 percent of those that returned the questionnaire unanswered indicated that they did so for "fundamental reasons" (28 percent), believed that the auditor-client relationships described did not exist in Germany (24 percent), or considered the research to be of no relevance to them (l6percent). The LWPs who explained their noncompliance with the research request indicated that their banks had no stock dealings and thus disqualified themselves from answering the questionnaire (30.8 percent). Other reasons varied from their banks not being ”true" banks, to being a subsidiary of another bank, and to having the bank's accounting personnel complete the questionnaire. 101 TABLE 5 Analysis of Nonusable Responses - WPs # % Subject had retired 5 18.5 No time to fill out the questionnaire 3 11.1 Could not answer with a simple yes or no 3 11.1 No reasons given 2 7.4 Subject had passed away 2 7.4 Mailed WPK's interpretation only 2 7.4 Were waiting for results of this researcher's meeting with officials of the WPK and IdW 2 7.4 Didn't know if IdW had approved research 1 3.7 Questionnaire was passed on to higher-ups l 3.7 Subject belonged to an audit association for co-ops* 1 3.7 Subject was out of the country 1 3.7 Subject did not perform any audits l 3.7 Subject needed more time 1 3.7 Not answered for "fundamental reasons"** 1 3.7 Only asked for summary of research results*** 1 3.7 Rounding 0.1 Total 1 100.0 *Prfifungsverband **Grundsfitzliche Erwfigungen ***He may have filled out the questionnaire since two questionnaires were received in neutral envelopes that were postmarked from the same city 102 TABLE 6 Analysis of Nonusable Responses - LKRs # % Not answered for "fundamental reasons” 7 28.0 Believed situations did not exist in Germany 6 24.0 Research not relevant to them 4 16.0 No time to fill out questionnaire 2 8.0 Claimed to have mailed questionnaire* 2 8.0 Independence more complex than questionnaire indicates l 4.0 Questionnaire was passed on to higher-ups l 4.0 No reasons given 1 4.0 Not involved in extending credit to business 1 4.0 25 100.0 *Two questionnaires were returned with no identification number. One of these was postmarked from the same city as one of the two nonrespondents. The other question- naire was returned from a city 200 miles away from the location of the other nonrespondent. TABLE 7 Analysis of Nonusable Responses - LWPs # % Bank not involved with stock dealings 30.8 Subject's bank not a "true" bank 7.7 Belonged to a subsidiary where no investment decisions were made 1 7.7 Believed situations did not exist in Germany 1 7.7 Believed there was no independence problem 1 7.7 Research not relevant to them 1 7.7 No reasons given 1 7.7 No time to fill out questionnaire 1 7.7 Not answered for "fundamental reasons" 1 7.7 Accounting department filled out questionnaire 1 7.7 Rounding (0.1) Total 13 100.0 103 Analysis of Usable Responses from Bank Officers Table 8 gives a breakdown of banks selected from the 12 largest German cities, by city. Branches are not included in this table. From this table it can be seen that for LKRs the rate fluctuates between cities from 28.6 percent to 100.0 percent. However, this may partly be due to chance because of the small number of banks selected in some cities. For LWPs the response rate for cities that responded was approximately at the overall average and above. However, for banks located in four cities, the response rate was zero. It could be speculated that banks located in these four cities either have few or no stock dealings or LWPs are not concerned about auditors' independence. It should be noted that the response rate for LWPs is consistently below those of LKRs, except for Frankfurt where the response rates of both LWPs and LKRs were the same. Perhaps auditors' independence may be of greater concern to the lending decision than to the investment decision. Comments on Nonresponse Bias With any research involving mailed questionnaires, there is the possibility that there are significant differences between those sample subjects that responded to the questionnaire and those that did not. This is a problem that exists if there is a significant proportion of nonrespondents. Thus, the responses received may not be representative of the population from which the original sample was selected. In this study the nonresponse rate for WPs was 66 percent. For LKRs and LWPs the nonresponse 104 TABLE 8 Breakdown of Banks Selected by City (not including branches) Total banks Usable Responses Usable Responses selected LKRs LWPs City # % # % # % Berlin 7 6.4 3 42.9 2 28.6 Bremen 7 6.4 4 57.1 0 0.0 Dortmund 2 1.8 1 50.0 0 0.0 Dfisseldorf 9 8.2 4 44.4 2 22.2 Essen 3 2.7 3 100.0 1 33.3 Frankfurt 38 34.5 13 34.2 13 34.2 Hamburg 15 13.6 5 33.3 4 26.7 Hannover 6 5.5 4 66.7 2 33.3 Kbln 8 7.2 5 62.5 4 50.0 Mfinchen 6 5.5 4 66.7 3 50.0 Nfirnberg 2 1.8 1 50.0 0 0.0 Stuttgart __;Z 6.4 .__2 28.6 __2_ 0.0 Total 110 100 0 _32_ 44 5 _31_ 28.2 105 rates were 48.1 percent and 71.4 percent, respectively. Even though it is difficult to determine to what extent nonresponse bias exists, if at all, since by definition a non- respondent does not respond, a test used by Buzby51 which may determine the possible presence of a significant nonresponse bias was applied. This test, suggested by Oppenheim, goes from the premise that "respondents who send in their questionnaires very late are roughly similar to nonrespondents."52 To perform this test for the randomly selected WP sample, the mean responses were computed for each of the 27 auditor-client relationships investigated by setting an "Independent" response equal to one and a "Not independent" response equal to zero. These mean responses were computed for the last 14 returned questionnaires and for the first 14 questionnaires received. (These were the total usable questionnaires received during the first two days.) A t-Test was performed to test for significant differences between the means of the early and late respondents.53 The test results failed to show any significant differences of the mean responses at an alpha level of 0.05 for 26 out of 27 situations. Most alpha levels exceeded 0.35. Examining the value of the t-statistics did not reveal a subtle bias either. Thirteen of the signs were negative, 11 were positive and in 3 cases the t-statistic was zero. As Buzby notes, "a few of the more signif- icant t's could still be the result of chance because of the large number of tests conducted."54 Thus, it may be concluded that the above test results tend to indicate a lack of a material nonresponse bias in the WP sample. 106 A similar test for nonresponse bias was not performed for LKRs and LWPs since the number of responses were too small to obtain a sufficient sample of late respondents to make this test meaningful. However, there is no reason to believe that LKRs and LWPs would have a nonresponse bias different from WPs. Hypotheses and Statistical Tests There are a total of nine hypotheses to be tested in this study. To facilitate the discussion, these hypotheses are grouped by the statistical procedures employed to test the null hypotheses in each of the categories. Each hypothesis is stated in both the null and alternative form. The expected results and the statistical tools to test each null hypothesis will be discussed. Hypotheses I through V 1. H0: There is no consensus among Wirtschaftsprfifer (WPs) regarding their perceptions of the concept of auditors' independence. H1: There is consensus among WirtschaftsprUfer (WPs) regarding their perceptions of the concept of auditors' independence. II. HO: There is no consensus among Leiter der Kreditabteilung (LKRs) of banks located in Germany regarding their perceptions of the concept of auditors' independence. H1: There is consensus among Leiter der Kreditabteilung (LKRs) of banks located in Germany regarding their perceptions of the concept of auditors' independence. 111. HO: There is no consensus among Leiter der Wertpapier- abteilung (LWPs) of banks located in Germany regarding their perceptions of the concept of auditors' independence. H1: There is consensus among Leiter der Wertpapierabteilung (LWPs) of banks located in Germany regarding their perceptions of the concept of auditors' independence. 107 Hypotheses I through V cont. IV. HO: There is consensus among Wirtschaftsprfifer (WPs) regarding their perceptions of the concept of auditors' independence that coincides with AICPA rulings on independence. H1: There is no consensus among Wirtschaftsprfifer (WPs) regarding their perceptions of the con- cept of auditors' independence that coincides with AICPA rulings on independence. V. H0: There is consensus among Wirtschaftsprfifer (WPs) regarding their perceptions of the concept of auditors' independence that coincides with SEC rulings on independence. H1: There is no consensus among Wirtschaftsprufer (WPs) regarding their perceptions of the con- cept of auditors' independence that coincides with SEC rulings on independence. For the purpose of testing various hypotheses, consensus is defined operationally as a statistically significant majority of opinion. Webster's New CollegiateDictionary defines consensus as (1) group solidarity in sentiment and belief; (2) general agreement; and (3) the judgment arrived at by most of those concerned. It appears that any aggregate opinions within a given group that range between a simple majority of opinion to unanimity represents a consensus. A simple majority of opinion is the minimum requirement for a consensus to exist. In a democratic society such as the United States or Germany, for many decisions of national importance, for example political elections or passage of most laws, a simple majority of votes is sufficient. Even though in this study consensus is defined as a statis- tically significant majority of opinion, the degree of consensus is presented as proportions of responses as well as in the form of frequencies. As Lavin notes, this ”allows the reader to evaluate 108 the degree of consensus from his or her own perspective."55 Expected Results and Statistical Tests Since WPs, LKRs, and LWPs each represent a distinct group of professionals, one would expect, a priori, that a high degree of consensus exists on any matter of importance within each group. However, recent controversy surrounding the WP profession's inde- pendence status suggests some disagreement concerning a number of issues. It is expected that, despite the controversey, there are still enough members in each group with the same view to result in a consensus within each of the three groups. (Consensus is defined as a statistically significant majority at a significance level of alpha less or equal to 0.05.) In regard to hypotheses IV and V, there is general agreement among internationally active accountants and accounting scholars that the U.S. has stricter and more explicit rules regarding auditors' independence than many other countries, including Germany. Even though rules and regulations do not necessarily reflect the perceptions of individuals, it is believed that WPs' perceptions will not agree with most SEC and AICPA rules. For situations in which the AICPA has taken a different (softer) stance than the SEC, the WPs' perceptions of independence are expected to coincide with those of the AICPA.56 Statistical Tests Employed To test hypotheses I, II, and III, the Binomial Test was used since the study is a one-sample design and the data were in 109 two discrete categories (independent versus not independent). The following statistical hypothesis was used to test these three hypotheses: H0: P = Q = 0.5 H1: P # Q where P = proportion of responses expected in the "Independent" category, and D II proportion of responses expected in the "Not independent" category. Since consensus was defined as a statistically significant majority of responses in one of the two categories, no consensus thus represents the situation where responses are equally divided into the two categories, i.e., P is equal to Q. To find any statistically significant difference of perception within the three sample groups, the Binomial Test was used since the data are binomially distributed.57 The binomial distribution is the sample distribution of the proportion we might observe in random samples drawn from a two-class population. The Binomial Test indicates whether it is reasonable to believe that the proportions observed in the sample were drawn from a population having a specified value of P. Although the value of P may vary between populations, it is fixed for any one population. However, even if the value of P is known for a given population, a random sample of observations from that population is not expected to contain exactly P proportions in one category and Q proportions of cases in the other category due to random effects. 110 As Siegel notes, the binomial distribution tends toward the normal distribution as the sample size (n) increases. The normal distribution is a good approximation when P is close to 0.5 and the sample size exceeds 25, which is the case for all three sample distributions under study. In this case, the sample distribution of the observed frequency (x) is approximately normal with a mean equal to nP and a standard deviation equal to nPQ. The Null hypothesis is tested as follows: 2 = x - ux = x - nP ox nPQ where z is normally distributed with a mean equal to zero and unit variance. Whether an obtained 2 is significant, in which case the null hypothesis must be rejected, can be determined by referring to a normal distribution table. With an alpha level equal to 0.05, a probability value greater than 0.05 would indicate that the null hypothesis cannot be rejected. A probability value from the normal distribution table equal to or less than 0.05 would indicate that the null hypothesis is not probable and should be rejected. For hypotheses IV and V, the statistical hypothesis was defined as: H01R=K where R = represents the consensus response of WPs and K = represents AICPA (SEC) rulings concerning auditors' independence. For example, for hypothesis IV, the Binomial Test as described 111 above is applied to determine if there is a statistically signif- icant majority opinion of WPs concerning a given auditor-client relationship tested. If the Binomial Test does not reveal a statistically significant majority of responses that are in agreement with the AICPA position concerning auditors' independence for this particular situation, the null hypothesis must be rejected and we could conclude that for the situation tested there is no consensus of WPs who agree with the independence rulings of the AICPA. This test is applied separately for each of the situations where the AICPA position is known. For hypothesis V the same procedures are employed using SEC rulings. Hypotheses VI and VII VI. H0: There are no differences regarding the perception of the concept of auditors' independence between Wirtschaftsprfifer (WPs), Leiter der Kreditabteilung (LKRs) and Leiter der Wertpapierabteilung (LWPs) of banks located in Germany. H1: There are differences regarding the perception of the concept of auditors' independence between Wirtschaftsprufer (WPs), Leiter der Kreditabteilung (LKRs) and Leiter der Wertpapierabteilung (LWPs) of banks located in Germany. VII. HO: There are no differences regarding the perception of the concept of auditors' independence between Wirtschaftsprfifer (WPs) and Certified Public Accountants (CPAs). lez There are differences regarding the perception of the concept of auditors' independence between Wirtschaftsprfifer (WPs) and Certified Public Accountants (CPAs). Expected Results and Statistical Tests Referring to hypothesis VI, it seems that there should be differences of perception among the three populations tested. 112 Each group has some characteristics which differ from the other groups. However, they also share certain characteristics such as a thorough knowledge of financial statement analysis. Concerning hypothesis VII, it appears that there should be few differences between German and U.S. auditors' perceptions of independence since both perform similar functions. However, rules and regu- lations differ significantly for a number of auditor-client relationships and may have had an influence on the perception of the individual auditors. It is felt that this influence as well as other factors that do differ as described in Chapter Two and Chapter Three, would lead to the conclusion that there are significant differences between the two groups. Statistical Tests Employed The Chi Square Test of Homogeneity was used to determine whether significant differences between groups existed; three groups for hypothesis VI, and two groups for hypothesis VII. The following statistical hypothesis is used to test hypothesis VI: H0: P1 = P2 = P3 H1: P1 # P2 3‘ P3 where P1 = proportion of "Independent" responses from WPs P2 = proportion of "Independent" responses from LKRs P3 = proportion of "Independent" responses from LWPs. For hypothesis VII the statistical form is: HO: P1 = P4 113 where P1 proportion of "Independent" responses from WPs P4 proportion of "Independent" responses from CPAs as obtained from Lavin's research findings. If there are no differences in perceptions of auditors' independence between the groups tested, then the proportions of "Independent" responses (or "Not independent” responses) will be the same for each population under study. On the other hand, if the Chi Square Test finds significant differences between the experimental groups, the null hypotheses of no differences must be rejected. In essence, this test determines whether the three samples for hypothesis VI (and the two samples for hypothesis VII) may be regarded as being drawn from the same population. The Chi Square Test may be used to determine the significance of differences between two or more independent groups when the data consists of frequencies in discrete categories.58 To test the null hypothesis, the following formula can be used: 191: - Eij)2 z 1 j=l Eij observed number of cases categorized in the ith row of the jth column where Oij Eij number of cases expected under the null hypothesis to be categorized in the ith row of the jth column. r = number of rows k = number of columns. The values of x2 yielded by this formula are distributed approximately as chi square with (r - l) (k - 1) degrees of freedom. Whether the computed test statistic (x2) is significant, i.e., the null hypothesis must be rejected, can be determined 114 by reference to a table of critical values of x25. A value of x2 which is equal to or greater than the value given for a signif- icance level of alpha = 0.05, indicates that the null hypothesis is false and should be rejected. In probability terms, if the probability associated with the computed value of x2 is equal or less to 0.05, the null hypothesis is not probable and consequently should be rejected. Of course, if the probability associated with the computed value of X2 is greater than alpha = 0.05, the null hypothesis should not be rejected. Hypotheses VIII and IX VIII. H0: Leiter's der Kreditabteilung (LKRs) perceptions regarding the concept of auditors' independence have no effect on their lending decisions. H1: Leiter's der Kreditabteilung (LKRs) perceptions regarding the concept of auditors' independence have an effect on their lending decisions. IX. H0: Leiter's der Wertpapierabteilung (LWPs) perceptions regarding the concept of auditors' independence have no effect on their investment decisions. H1: Leiter's der Wertpapierabteilung (LWPs) perceptions regarding the concept of auditors' independence have an effect on their investment decisions. For both, investment and lending decisions, many factors enter into the decision making process. The decision maker's perception of the independence of the auditor of a firm's financial statements is only one of these factors. Nonetheless, it is expected that the perception of auditors' independence has an observable effect on the financial decisions by users of audited financial statements. 115 Statistical Tests Employed Hypotheses VIII and IX are tested using the following statistical hypothesis: ”03 U1 = Hz H1: U1 f U2 where: “1 = mean of the financial decision of those who perceive the auditor to be "independent" u2 = mean of the financial decision of those who perceive the auditor to be "not independent". The mean response was computed for the 5-point decision scale of those respondents who perceived the auditor to be independent (N1) and of those respondents who perceived the auditor to be not independent (uz). The t-Test was used to test whether there was a statistically significant difference between the two means in order to make inferences concerning the differences betwen the population means of the two groups.59 If it is found that the sample means are significantly different, the null hypothesis should be rejected. However, if no statistically significant differences are found, the conclusion could be reached that the perception of independence has no effect on the respondents' financial decisions. The t-statistic can be computed using the fellowing formula: t = 331 - XZLCul - 112) sz ( l. + l.) '11 n2 where Ki, (ii) mean of the financial decision of those respondents who perceive the auditor to be "independent" ("not independent") “1’ (NZ) population mean of the financial decision of those who 116 perceive the auditor to be "independent” ("not independent") Sp - the pooled variance of the sample distribution of the two types of respondents which is computed as follows: sz = (n1 - 1) 812 + (n2 - 1) 822 n1+n2-2 where S12 (S22) is the variance of the sample distribution of those respondents who perceive the auditor to be "independent" ("not independent"). n1 (n2) = sample size of those respondents that perceived the auditor to be "independent" ("not independent"). Referring to a table of critical values for t, it can be determined whether the computed t-statistic is statistically significant or not. A probability associated with the computed t-value which is equal to or less than alpha = 0.05 indicates that the null hypothesis is not probable and thus should be rejected. On the other hand, if the probability associated with the computed t-value is greater than 0.05, the null hypothesis should not be rejected. Additional Comments To perform the various statistical tests and procedures, use was made of the Statistical Packgggrfor the Social Sciences (SPSS) made available on the Computer System at Michigan State University.60 Some computations were performed manually. In the following chapter the results of the hypothesis tests are discussed. Since each auditor-client relationship described in the questionnaire is a separate issue, each is considered a separate variable and is analyzed and tested individually. 117 CHAPTER FOUR--FOOTNOTES The term auditor is used in this chapter to refer not only to a single auditing practitioner but also to refer to an auditing firm. See Accounting Series Release No. 126 (1972); also Rappaport, L. H., SEC AccountingPractice and Procedure - Third Edition (New York: The Ronald Press Company, 1972), Chapter 26. See Security and Exchange Commission, Regulation S-X - Rule 2-01 (1972); and American Institute of Certified Public Accountants, Code of Professional Ethics (New York: AICPA, 1975), Rule 101. See, FASB Discussion Memorandum: An Analysis of Issues related to Criteria for Determining Materiality, Financial Accounting Standards Board (March 21, 1975). Wirtschaftsprfiferkammer, Richtlinien ffir die Berufsausfibung der Wirtschaftsprfifer und vereidigten Buchprfifer (July 1974), p. 7. Niehus, R. J., "The Public Accounting Profession in Germany," The Accountant (January 4, 1973), p. 14. Wirtschaftsprfiferkammer, Richtlinien ffir die Berufsausfibung der Wirtschaftsprfifer und vereidigten Buchprfifer (December 1, 1977), pp. 7-8. This practice also has other ramifications. To quote Juenger and Schmidt: "The possibility of loss inherent in the ready negotiability of such an instrument [bearer shares], and the impossibility for the stock corporation to communicate directly with its anonymous owners, make it advisable to deposit the certificate with banks for safe keeping and the collection of dividends. The banks...soon obtained blanket authorization for the exercise of voting rights from their depositors... The bankers' vote, combined with their own large holdings and those controlled by them through invest- ment funds, is a major factor in the dominant role played by German financial institutions. See, Juenger, F. K. and Schmidt, L., German Stock Corporation Act (Kbln, Chicago: Verlag Dr. Otto Schmidt KG - Commerce Clearing House, Inc. 1967), pp. 9-10. This view was also expressed by the WPK. See Appendix D, Fragen ll und 12. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 118 The new Directives of the WPK do not prohibit ownership of audit client shares by the spouse of the auditor. This type of relationship is expressly prohibited for U.S. auditors since this is considered to be a situation involving a direct financial interest. See Schruff, L., Der Wirtschaftsprfifer und seine Pflicht- ppfifungsmandate (Dfisseldorf: IdW-Verlag GmbH, 1973). Mitteilungsblatt der Wirtschaftsprfiferkammer Nr. 67 (April 2, 1976), p. 9. See, "Aus der Rechtsprechung," Die Wirtschaftsprfifung_(Heft 3, 1978), pp. 80-84.; and Mfiller, H. P., "Anmerkungen zum Urteil des BGH vom 13. Oktober 1977 fiber die aktienrechtliche Unternehmenseigenschaft von Gebietskbrperschaften," Die Wirtschaftsprfifung (Heft 3, 1978), pp. 61-67; also, WLfifthansa Urteil," Die Aktiengesellschaft (Nr. 12, 1975), pp. 330-333. AICPA, Code of Professional Ethics; Concepts of Professional Ethics - Rules of Conduct - Interpretation of Rules of Conduct (March 1975 Edition) American Institute of Certified Public Accountants (1975), pp. 29-30. See Rappaport, L. H., Chapter 26, pp. 40-44. WPK, Richtlinien... (1974), p. 8. See Budde, W., in: Busse von Colbe, W., and Lutter, M. (eds.): Wirtschaftsprfifung Heute: Entwicklungoder Reform? Ein Bochumer Symposium (Wiesbaden: Verlag Dr. Th. Gabler, 1977), p. 137. WPK, Richtlinien... (1977), p. 8. See, for example, AICPA, Code of Professional Ethics (1975), pp. 30-32; also, see Rappaport, L. H., Chapter 26, pp. 48-51; and Accounting Series Release No. 126 (1972). WPK, Richtlinien... (1977), p. 7. Accounting Series Release No. 126 (1972). See Gesetz fiber eine Berufsordnupgfider Wirtschaftsprfifer (Wirtschaftsprfiferordnung) i.d.F. der Bekanntmachungpder Neufassung v. November 5, 1975 (Dfisseldorf, IdW-Verlag GmbH, 1976), pp. 33-34. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 119 For example, is managing an office building considered management consulting and thus a compatible activity or is it considered a business activity and thus is not permitted? The WPK in its response to this research considered it a compatible activity, whereas a prominent German WP reached the opposite conclusion. See Appendix B, Frage 4. See Accounting Series Release No. 126 (1972) and, AICPA, Code of Professional Ethics (1975), pp. 30-32. WPK, Richtlinien... (1977), p. 7. German corporations have two boards of directors, namely the supervisory board (Aufsichtsrat) and the board of manage- ment (Vorstand). The supervisory board's function is to oversee management, including the board of management. In the U.S. the functions of both types of directors are combined into one board of directors. If we translate Aufsichtsrat as "board of directors", then this type of auditor-client relationship also applies to the United States. However, a U.S. auditor is prohibited from serving on the board of directors of an audit client. Havermann claims that the SEC limits any accounting firm from deriving more than 5 percent of its total revenue from any one audit client. See, "Meinungsspiegel," Betriebswirtschaftliche Forschung und Praxis (Heft 2, 1976), p. 217. However, there is no such rule currently in effect or being contemplated, according to a member of the SEC staff. (Per telephone conversation by this researcher with a member of the SEC staff on May 31, 1978). Knief, P., "Der Wirtschaftsprfifer im Spannungsfeld zwischen gesetzlichem Auftrag und 6ffentlicher Erwartung," Betriebswirtschaftliche Forschung und Praxis (Heft 2, 1976), p. 138. Accountants International Study Group, Indgpendence of Auditors (October, 1976), par. 30. However, the WPK urged its members in 1975 (Mitteilungsblatt Nr. 64, p. 4) to seek their advice when considering acceptance of a supervisory board position which may compromise the profession. See, WP-Handbuch 1977 (Dfisseldorf: IdW-Verlag, 1977), p. 51-52. See Kruk, M., "Wirtschaftsprfifer als Aufsichtsrflte? Gefahren ffir den Ruf des Berufsstandes," Frankfurter Allggmeine Zeitung_ (April 9, 1975), p. 13. See, Mitteilungsblatt der Wirtschaftsprfiferkammer Nr. 67 (April 2, 1976), p. 10. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 120 Ibid. (Anlage), pp. 1-2. "Related enterprise" is defined in paragraph 15 of the Stockcorporation Law of 1965 as follows: "Related enter- prises are legally independent enterprises which, in relation to each other are majority-owned and majority-owning enter- prises (§ 16), controlled and controlling enterprises (§ 17), members of an affiliated group of companies (5 18), interlocking enterprises (§ 19), or parties to an enterprise agreement (§ 291, 292)." See Juenger, F. K., and Schmidt, L. (trans- lators) German Stock Corporation Act (Kbln, Chicago: Verlag Dr. Otto Schmidt KG - Commerce Clearing House, Inc. 1967), pars. 15-19, 291-292. WPK, Richtlinien... (1977), p. 8. Lavin's selection criteria included that the situations should be "representative examples of cases in which an auditor might appear to be lacking in independence with respect to an audit client." See Lavin, D., "Financial Statement Users' and Accountants' Perceptions of the Independence of the Auditor in Selected Client-Auditor Relationships" (Unpublished Dissertation, University of Illinois, 1974), pp. 85-86. For a more detailed account, see Leabo, D. A., Basic Statistics - Fifth Edition (Homewood: Richard D. Irwin, Inc., 1976), pp. 46-48. Since the organizational form of partnership is not common in Germany, partner is translated as Wirtschaftsprfifer. It was felt that this translation was the most appropriate for the German accounting environment. A Wirtschaftsprfifer's position in an accounting firm is similar to a U.S. partner's position. He has procuration (Prokura), and usually shares in the profits of the firm. In question 4 of the questionnaire, partner was translated as a "staff member of the accounting firm with 5 years auditing experience." This was done to minimize nonresponses to this question since the professional law (WPO) seems to indicate that managing a building is incompatible with the reputation of the WP profession. Richter, M., "Die Unabhangigkeit des Wirtschaftsprfifers", Universitat des Saarlandes (July 1976). See Thfimmel, M., "Dr. Richter's Fragebogen," Leserbriefe - Das Handelsblatt (June 26, 1976), p. 9. This researcher was informed by representatives of both institutions that they have adopted a policy of non-interference in any ongoing research projects involving the WP profession. 43. 44. 45. 46. 47. 48. 49. 50. 121 Dr. Brfinner, President of the regional office of the Institut der Wirtschaftsprfifer in Berlin, notified by WPs in Berlin who had received a questionnaire, discussed the research questionnaire in a special subcommittee meeting. Since this subcommittee could not reach unanimous independence decisions on most of the auditor-client relationships inves- tigated, this researcher was informed by Dr. Brfinner that any research findings from this study must be interpreted cautiously. The response rate from WPs living in Berlin seems not to have been negatively affected, however, since it was above the average response rate for WPs in general. A copy of the WPK's interpretation of current auditor inde- pendence rules and regulations pertaining to the specific auditor-client relationships described in the questionnaire can be found in Appendix D. These are in essence the same responses given by Mr. Pfefferer of the WPK during the December 12, 1978 meeting of this researcher with Mr. Pfefferer of the WPK and Mr. Kaminski of the IdW. See Richter, M., Die Sicherung der aktienrechtlichen Publizitat durch ein Aktienamt (Kfiln: Carl Heymanns Verlag KG, 1975), p. 100. For example, Ziegler, in 1976, mailed a questionnaire to bankers, financial analysts and individual stockholders, which dealt with the attitude of these three groups toward the auditor's standard report. The response rate of individual stockholders was only 10 percent, compared to 54 and 40 percent for bankers and financial analysts, respectively. See, The Commission on Auditors' Responsibilities. M. Cohen, Chairman (1978), p. 183-184. Richter, M., "Die Unabhangigkeit des Wirtschaftsprfifers,". Richter does not claim that this group is representative of all financial statement users. He speculated, however, that public opinion about the Wirtschaftsprfifer is heavily influenced by the (subjective) opinions of this group. He quotes some evidence which suggests that financial journalists usually are more critical than other groups. See Richter, M., "Die Unabhfingigkeit des Wirtschaftsprfifers," p. 22. "Die grbssten Banken in Deutschland: 50 Riesen," Capital (November 1977), p. 144. Some of these mammoth banks have more than one main office; however, in this study only one of the main offices was treated as a "main office" bank. The other main offices were treated as "branch offices". 51. 52. 53. 54. 55. 56. 57. S8. 59. 60. 122 Buzby, S. L., "Selected Items of Information and Their Disclosure in Annual Reports," The Accounting Review (July 1974), pp. 423-435. Oppenheim, H. N., Questionnaire Design and Attitude Measurement (New York: Basic Books, 1966), p. 34. The t-Test is discussed on page5115-116 in this chapter. Buzby conducted 38 different t-Tests of which 36 failed to achieve an alpha level of 0.15 or less. See Buzby, S. L., p. 427. ~ Lavin, D., "Perceptions of the Independence of the Auditor," The Accounting Review (January, 1976), p. 43. The areas in which the AICPA and the SEC have taken different positions involve mainly EDP and bookkeeping services. For a detailed account of differences between the AICPA and SEC concerning auditors' independence, see Lavin, D., "Financial Statement Users' and Accountants' Perceptions...", pp. 73-77. This discussion is mainly based on Siegel, S., Nonparametric Statistic for the Behavioral Sciences (New York: McGraw-Hill Company, Inc., 1956), pp. 36-42. For a more detailed discussion, see Siegel, 5., pp. 104-11. For a discussion of the t-Test, see Smith, L. H., and Williams, D. R., Statistical Analysis for Business: A Conceptual Approach (Belmont: Wadsworth Publishing Company, Inc., 1971), pp. 393-429. See Nie, N. H., Bent, D. H., and Hull, C. H., Statistical Package for the Social Science - Second Edition (New York: McGraw-Hill Book Company, 1976). CHAPTER FIVE RESULTS OF THE SURVEY In this chapter the responses from the mail survey are discussed and analyzed. There are a total of 17 questions describ- ing a variety of auditor-client relationships. However, since a number of questions involve multiple separate situations, a total of 27 auditor-client relationships were investigated. Since each of these 27 auditor-client relationships essentially is a separate issue and thus represents a separate variable, each is discussed and analyzed individually. The following discussion deals with two major issues: (a) the perceptions of auditors' independence by the three exper- imental groups under study, namely WPs, LKRs, and LWPs, and (b) the financial decisions of LKRs and LWPs. The first part of the discussion involves the analysis of the responses of the three groups under study concerning their perceptions of auditors' independence and the testing of null hypotheses I through VII. Various background variables are analyzed to determine their influence on the responses of the sample subjects. In the second part, the responses of LKRs and LWPs concerning the effect of their perceptions of auditors' independence on their financial decisions are analyzed. This includes the testing of 123 124 null hypotheses VIII and IX. Perceptions of Auditors' Independence The situations investigated in this study are analyzed and discussed by the categories of auditor-client relationships presented in Chapter Four. The individual situations are not discussed in the same order as they are presented in the questionnaire. Table 9 lists all auditor-client relationships investigated and is included for easy reference. The results of testing hypotheses I through VII at a significant level of alpha §_0.05 are also summarized in this section in Tables 28 and 31. It should be noted that some situations were not used to test certain null hypotheses. As mentioned in Chapter Four, hypothesis VII, involving a comparison of WPs' and CPAs' perceptions concerning auditors' independence in appearance, was only tested on 10 of the 27 situations investigated. The remaining 17 situations were not used to test null hypothesis VII since CPAs' perceptions for those 17 situations have not been empirically investigated.1 Hypothesis IV and V also were not tested on certain auditor- client relationships that were investigated in this study. These hypotheses deal with a comparison of consensus responses of WPs with relevant AICPA rulings (hypothesis IV) and appropriate SEC rulings (hypothesis V). Situation 6A through 6E, Situations 17A through 17E, and Situation 16 were not used to test null hypotheses IV and V, because Situations 6A through 6E and Situation 16 apply only to the German accounting environment. Situation 17A through 125 TABLE 9 Auditor-Client Relationships Investigated2 Pursuant to a plan of recapitalization, the existing debt of the company was exchanged fer five-year promissory notes. The accounting firm received the same kind of promissory notes in payment of its audit fee. A partner in an accounting firm whose proposed Client A was a wholly owned subsidiary of Corporation B, owned one percent of the stock of Corporation B. The partner who owns these stocks would not in any way be involved with the year-end audit. A partner in an accounting firm whose proposed Client A was a wholly owned subsidiary of Corporation B, owned one percent of the stock of Corporation B. The partner who owns these stocks would be in charge of the year- end audit. A client of an accounting firm was engaged in the business of selling franchises. Two partners of this accounting firm invested approximately five percent of their per- sonal fortunes to buy one half of the stock of a corpor- ation which held a franchise granted by this client. Except for the payment of a percentage of sales to the franchisor client, the franchise operated independently. A partner in an accounting firm owned stocks of a proposed client for which he was engaged to do the year-end audit. Consider each of the following situations separately. Situation A. The partner owned a very small number of shares of the client amounting to less than one percent of his net worth. Situation B. The partner owned 3 percent of the client's stock amounting to 10 percent of his net worth. Situation C. The partner owned 10 percent of the client's stock amounting to 10 percent of his net worth. A bank acquired a large number of shares of Company S. In addition, the same bank also owned shares of the auditing firm that was engaged to perform the year- end audit of Company 5. Consider each of the following situations separately. Situation A. The bank owned approximately 10 percent of the outstanding stock of the auditing firm. Situation B. The bank owned between 11 and 24 percent of the outstanding stock of the auditing firm. 10. 11. 12. 126 TABLE 9 (continued) Situation C. The bank owned between 25 and 49 percent of the outstanding stock of the auditing firm, Situation D. The bank owned exactly 50 per- cent of the outstanding stock of the auditing firm. Situation E. The bank owned more than 50 percent of the outstanding stock of the auditing firm. In addition to the audit, an accounting firm provided services for the client which included maintaining the journals and ledgers, making adjusting entries and preparing financial statements. In order to keep certain information confidential, the client had the accounting firm perform the following services in addition to the audit: (a) prepare the executive payroll (b) maintain selected general ledger accounts in a private ledger. From the books of original entry, client personnel prepared printed tapes that could be read on an optical scanner and sent the tapes to the account- ants' office. The accountants forwarded the tapes to a service bureau. The accountants received the print-outs of the financial statements and general ledgers and sent them to the client. The accountants did not edit the input data prior to transmission to the service bureau. The account- ants provided this service in addition to the audit. A was the controller of Company Z. He was not an elected officer nor did he have any stock holdings in Company Z. A's brother, 8, was a partner in the public accounting firm that audits Company Z's books. However, B was not the partner in charge of the audit. A partner in a public accounting firm had a brother-in-law who was sales vice president for a recently acquired client. The brother- in-law was not directly involved in the finan- cial affairs of the company and the partner was not connected with the audit in any way. A partner in an accounting firm managed a building owned by an audit client. 127 TABLE 9 (continued) 13. 14. 15. 16. 17. A partner in an accounting firm (qualified as a lawyer) also acted as the general counsel for an audit client. He received fees for such legal services and, through the accounting partnership, for accounting services rendered concurrently. An accounting firm had its office in a building which was owned by a client. The accounting firm occupied approximately 25 percent of the available office space in the building, and the client occupied the remainder. An accounting firm rented block time on its computer to a client when the client's computer became overburdened. A partner of an accounting firm was also a member of the Supervisory Board of Corporation L. Cor- poration L was one of the largest suppliers of Corporation M. The accounting firm was engaged to perform the year-end audit of Corporation M. A certain portion of an accounting firm's revenue consisted of audit fees from one particular client. Consider each of the following sit- uations separately. The fees from this par- ticular client represented approximately: Situation A: 5 percent of total revenue Situation B: 10 percent of total revenue Situation C: 25 percent of total revenue Situation D: 50 percent of total revenue Situation E: 75 percent of total revenue 128 17E were not used for these hypothesis tests because neither the AICPA nor the SEC have stated their position on these auditor- client relationships. To facilitate the following discussion, the results of testing hypotheses I, II, III, and VI are included in the discussion of each of the situations investigated. Although the reader can determine the results for hypotheses IV, V, and VII from this discussion, the results of these hypothesis tests are also dis- cussed in a separate section and are summarized in Table 28 to eliminate repetition in the discussion that fellows. Financial Interest (direct and indirect) Six different auditor-client relationships are investigated in this category. Since the situations are discussed in a different order than they were presented in the questionnaire that was mailed to the sample subjects, the question number used in the questionnaire for each situation is given in brackets for cross- reference.3 Situation 1 - Pursuant to a plan of recapitalization, (Question 6) the existing debt of the company was exchanged for five-year promissory notes. The accounting firm received the same kind of promissory notes in payment of its audit fee. There is no specific rule that forbids a WP from undertaking an audit under these circumstances. Even the WPK's interpretation of this situation notes that the means by which the auditor is paid plays no role in the judgment of an auditor's independence. 129 As a non sequitur they point out that providing credit to an audit client via postponement of payment of fees is sometimes questionable.4 Both the AICPA and the SEC have ruled that the auditor is not considered to be independent in this situation.5 Lavin's research found that loan officers and financial analysts both considered the auditors6 to be not independent (63 percent and 75 percent, respectively) whereas members of the AICPA were evenly divided, indicating no consensus among this group.7 Table 10 shows that 54.2 percent of the WP5 considered the auditors to be independent, as did 54.8 percent of LWPs that responded. However, only 38.2 percent of LKRs considered the auditors to be independent. TABLE 10 Analysis of Responses to Situation 1 WPs LKRs LWPs # % # ° # % Independent 58 54.2 21 38.2 17 54.8 Not independent 49 48.8 34 61.8 14 45.2 Total 107 100.0 55 100.0 31 100.0 Mean8 0.542 0.382 0.548 Binomial Test: Probability of no consensus (p): 0.7113 0.1048 0.7201 Chi Square Test: x2 = 4.1150 Significance level 0.1278 Degrees of Freedom 2 130 Conclusions from Statistical Tests As noted in Chapter Four, the Binomial Test was used to test null hypotheses I, II, and III. The p-values of the Binomial Test for all three groups were in excess of the significance level of alpha = 0.05.9 Therefore, null hypotheses I, II, and III which state that there is no consensus within each experimental group could not be rejected since no statistically significant majority of Opinion was indicated. The results of the Chi Square Test of Homogeneity, which was employed to test whether the three experimental groups could be regarded as being drawn from the same population (null Hypothesis VI), proved not to be statistically significant. The obtained xz-value of 4.1150 was statistically significant at alpha = 0.1278. Since this exceeds the specified alpha level of 0.05, null hypothesis VI, which states that there are no differences between the three experimental groups, cannot be rejected. The results of the Chi Square Test are consistent with the result of the Binomial Test. However, the fact remains that LKRs did take the opposite position of both the WP5 and the LWPs. Nonetheless, the differences were not statistically significant. Situation 2 - A partner in an accounting firm whose (Question 11) proposed Client A was a wholly owned subsidiary of Corporation B, owned one percent of the stock of Corporation 8. The partner who owns these stocks would not in any way be involved with the year-end audit. 131 Since this situation represents an auditor with a direct financial interest, both the SEC and the AICPA consider the auditing firm not to be independent. For the German auditor there are no rules forbidding this type of relationship. Even the December 1977 revision of the WPK's Directives does not prohibit this type of situation. According to the WPK's interpretation of the applicable rules, this situation is not prohibited.10 As can be seen from Table 11, a large majority of each of the three groups considers the auditing firm to be independent in this case. The fact that the partner in question is not involved in the audit may have made a great difference in the perceptions of the auditors' appearance of independence. Of the WP5 responding, 87 percent considered the auditors to be independent in this case, as TABLE 11 Analysis of Responses to Situation 2 WPs LKRs LWPs # % # 5 # Independent 94 87.0 53 98.1 26 86.7 Not independent 14 13.0 1 1.9 ._;4 13 3 Total 108 100.0 54 100.0 :gg: 100.0 Mean 0.870 0.981 0.867 Binomial Test: Probability of no consensus (p): <0.0001 <0.0001 <0.0001 Chi quare Test: x2 = 5.4557 Significance level = 0.0654 Degrees of Freedom = 2 132 did 98.1 percent of the LKRs, and 86.7 percent of the LWPs. Conclusions from Statistical Tests The p-values obtained by applying the Binomial Test for all three groups were far below the significance level of alpha = 0.05. Therefore, null hypotheses I, II, and III which state that there is no consensus within a group must be rejected since a statistically significant consensus was indicated for all three experimental groups. The results of the Chi Square Test were consistent with the results of the Binomial Test by proving not to be statistically significant. The obtained xz-value of 5.4557 was significant at alpha = 0.0654. Since this exceeds the specified alpha level of 0.05, null hypothesis VI which states that there are no diff- erences of perception of auditors' independence between the three experimental groups cannot be rejected. Situation 3 - A partner in an accounting firm whose (Question 12) proposed client was a wholly owned subsidiary of Corporation B, owned one percent of the stock of Corpor- ation B. The partner who owns these stocks would be in charge of the year-end audit. This situation is exactly the same as the previous one except that in this case the partner in question will be in charge of the audit. As noted above, the AICPA and the SEC do not diff- erentiate between the two situations; thus, in this case the auditing firm involved is also considered not to be independent. The WPK also the previous case rules.11 The WPK which is contrary However, the of the WPK. Only of LKRs, and 41.4 the auditing firm that the partner in question will be in charge of the audit affected 133 does not differentiate between this case and as expressed in their interpretation of existing considers the auditing firm to be independent to the AICPA and SEC position. three groups tested disagreed with the view 45.4 percent of all WPs responding, 49.1 percent percent of all LWPs who responded considered still to be independent. Apparently, the fact their perception of the auditors' independence in appearance. TABLE 12 Analysis of Responses to Situation 3 WPs LKRs LWPs # % # % # % Independent 49 45.4 27 49.1 12 41. Not independent 59 54.6 28 50.9 17 58. Total 108 100.0 55 100.0 29 100. Mean 0.454 0.491 0.414 Binomial Test: Probability of no consensus (p): 0.6439 0.9999 0.4583 Chi Square Test: x2 = 0.47621 Significance level = 0.7881 Degrees of Freedom = 2 134 Conclusions from Statistical Tests The Binomial Test showed that null hypotheses I, II, and III which state that there is no consensus within each experimental group could not be rejected. The computed p-values were all in excess of alpha = 0.05. Thus it can be concluded that no stat- istically significant consensus was present in each group. The Chi Square Test showed that there were no significant differences between the three groups and thus null hypothesis VI, which states that there are no differences of perceptions concerning auditors' independence between the three experimental groups, cannot be rejected. The computed xz-value of 0.4762 corresponds to an alpha of 0.7881 which is far in excess of the set alpha = 0.05. Situation 4 - A client of an accounting firm was en- (Question 10) gaged in the business of selling fran- chises. Two partners of this account- ing firm invested approximately five percent of their personal fortunes to buy one half of the stock of a corpor- ation which held a franchise granted by this client. Except for the pay- ment of a percentage of sales to the franchisor client, the franchise operated independently. The AICPA and the SEC both agree that under these circumstances the accounting firm's independence is impaired. The results of Lavin's research show that among the CPAs responding to his survey, only 25 percent considered the accounting firm still to be independent, as did 32 percent of the loan officers and 20 percent of the financial analysts. The WPK in its response to this situation indicated that the 135 TABLE 13 Analysis of Responses to Situation 4 WPs LKRs LWPs # % # % # % Independent 58 54.7 33 60.0 19 65.5 Not independent _48_ 45.3 _22_ 40.0 .12. 34.5 Total _l_0_§_ 19_()_.0_ i 100.0 __2_i 100.0 Mean 0.547 0.600 0.655 Binomial Test: Probability of no consensus (p): 0.6374 0.1770 0.1360 Chi Square Test: X2 = 1.2303 Significance level = 0.5406 Degrees of Freedom = 2 circumstances are hardly applicable to the German business environ- ment since franchising is an American invention which so far has found little application in Germany.12 However, an article by Wrabetz in 1974 suggests that franchising has become a more common practice in recent years and thus, theoretically, it does apply.13 As Table 13 indicates, 54.7 percent of the WP5 responding considered independence not to be impaired. A similar view was expressed by 60 percent of the LKRs responding and 65.5 percent of the responding LWPs. 136 Conclusions from Statistical Tests Even though the majority of respondents in each group con- sidered the auditors independent, the null hypotheses of no consensus within each group could not be rejected. As can be seen from Table 13, the Binomial Test resulted in p-values which exceeded alpha = 0.05 for all three groups. Thus, null hypotheses I, II, and III cannot be rejected. The results obtained from the Chi Square Test indicate that null hypothesis VI cannot be rejected. The computed x2-value of 1.2303 corresponds to an alpha level of 0.5406. Thus, it can be concluded that there are no differences between the three groups concerning their perceptions of the concept of auditors' independence. Situation 5 - A partner in an accounting firm owned (Question 14) stocks of a proposed client for which the accounting firm was engaged to do the year-end audit. Consider each of the following situations separately. A. The partner owned a very small number of shares of the client amounting to less than one per- cent of his net worth. B. The partner owned 3 percent of the client's stock amounting to 10 percent of his net worth. C. The partner owned 10 percent of the client's stock amounting to 10 percent of his net worth. All three situations are clearly prohibited by the AICPA and the SEC since they represent a direct financial interest of 137 an auditor in a client firm. The latest revision of the WPK's Directives also prohibits any direct financial interest of an auditor in an audit client. Therefore, in all three situations, an auditing firm would be lacking the appearance of independence beginning January 1, 1979.14 The results of this survey differ from these official guide- lines. As Table 14 shows, for Situation 5A, 75.5 percent of all WPs responding, 89.1 percent of all LKRs, and 90.0 percent of all LWPs responding to the questionnaire considered the auditors to be independent. For Situation BC, the results are almost reversed. Here, 20.6 percent of the WP5, 27.3 percent of the LKRs, and 16.7 percent of the LWPs responding considered the auditors to be independent. Results for Situation 5B are mixed. Whereas a majority of LKRs (56.4 percent) still considered the auditors to be independent under the described circumstances, only 31.1 percent of the WP5, and 46.7 percent of the LWPs considered the auditors to be independent. The perceptions of each group are consistent in that the larger the amount of client-owned stocks, the fewer the responses in the "Independent" category. Conclusions from Statistical Tests For Situation 5A and Situation 5C, the p-values obtained from the Binomial Test proved to be below alpha = 0.05 for all three groups indicating that the null hypotheses of no consensus must be rejected. Thus, for Situation 5A there was a statistically 138 TABLE 14 ‘ Analysis ongesponses to Situation 5 WPs LKRs LWPs # % # % # % Situation 5A Independent 80 75.5 49 89.1 27 90.0 Not independent 26 24.5 6 10.9 3 10.0 Total 106 100.0 55 100.0 30 100.0 Situation 5B Independent 33 31.1 31 56.4 14 46.7 Not independent 73 68.9 24 43.6 16 53.3 Total 106 100.0 55 100.0 30 100.0 Situation 5C Independent 22 20.6 15 27.3 5 16.7 Not independent 85 79.4 40 72.7 25 83.3 Total 107 100.0 55 100.0 30 100.0 Situation 5A - Mean 0.755 0.891 0.900 Situation 5B - Mean 0.311 0.564 0.467 Situation 5C - Mean 0.206 0.273 0.167 Binomial Test: Probability of no consensus (p): Situation 5A <0.0001 <0.0001 <0.0001 Situation 5B 0.0007 0.4188 0.8555 Situation 5C <0.0001 0.0010 0.0003 Chi Square Test X2 Sigpificance level Situation 5A 6.1356 0.0465 Situation 5B 10.0422 0.0066 Situation 5C 1.5220 0.4672 139 significant consensus within each of the three groups that the auditors were perceived to be independent. Similarly, for Situation 5C, there was a statistically significant consensus within each experimental group that the auditors were perceived not to be independent under the circumstances described. Consequently, hypotheses I, II, and 111 must be rejected for these two auditor-client relationships. For Situation 5B, the results of the Binomial Test were mixed. Even though among WPs, the p-value obtained was below the alpha = 0.05 indicating consensus within this group, for LKRs and LWPs the p-values obtained proved to be greater than alpha = 0.05. Thus, for LKRs and LWPs the null hypothesis of no consensus could not be rejected. Therefore, null hypothesis I cannot be rejected, whereas hypothesis II and 111 must be rejected since the computed p-values exceeded the predetermined alpha level of 0.05 by a wide margin. The results obtained from the Chi Square Test indicated that for Situation 5A and Situation 5B, hypothesis VI of no differences of perceptions concerning auditors' independence between the three groups must be rejected. Whereas these results are consistent with those obtained from the Binomial Test for Situation 5B, they are not consistent with those obtained from Situation 5A. This can be explained by the definition of consensus in this study. For Situation 5A, even though the majority responses were signif- icant for all three groups, the degree of consensus differed between 75.5 percent fur WPs to 90.0 percent for LWPs, causing the xz-statistic to be significant at an alpha level of 0.05. For Situation BC, the xz-value obtained corresponds to a 140 probability level of 0.4672 which is greater than alpha = 0.05, indicating that null hypothesis VI of no differences between the three groups cannot be rejected. Situation 6 - A bank acquired a large number of shares (Question 15) of Company S, large enough to enable the bank to significantly influence the man- agement of Company 3. In addition, the same bank also owned shares of the aud- iting firm that was engaged to perform the year-end audit of Company S. Con- sider each of the following situations separately. A. The bank owned approximately 10 per- cent of the outstanding stock of the auditing firm. B. The bank owned between 11 and 24 percent of the outstanding stock of the auditing firm. C. The bank owned between 25 and 49 percent of the outstanding stock of the auditing firm. D. The bank owned exactly 50 percent of the outstanding stock of the auditing firm. E. The bank owned more than 50 percent of the outstanding stock of the auditing firm. Since non-CPAs are not permitted to have a financial interest in an auditing firm in the United States, the above described auditor-client relationships are, for the U.S., of a hypothetical nature only. For Germany, these situations are of interest because ownership by non-WPs is allowed and occurs in practice. The WPK's interpretation of current regulations concerning these situations is that Situations 6A through 6D are allowed 141 under professional law, implying that the auditing firm is considered to be independent in appearance.15 Situation 6E is prohibited by paragraph 164 of the Stock- corporation Law of 1965. However, as the WPK in its response to this question noted, independence may be impaired even if ownership is less than 50 percent if there are special circumstances which would make it appear that the bank has a dominant influence (herrschenden Einfluss) on management.16 As Table 15 indicates, all three experimental groups' per- ceptions are stricter than current law. For Situation 6A, a majority in each group considered the auditing firm to be independent under these circumstances, namely 57 percent of all WPs responding, 79.2 percent of all LKRs, and 65.5 percent of all LWPs responding. For Situation 6B, the WP5 are almost evenly divided in the "Independent" and "Not independent" category (49.5 percent versus 50.5 percent). Among LKRs, 66 percent considered the auditing firm to be independent, as did a small majority, 51.7 percent, of all LWPs that responded to the questionnaire. However, for Situation 6C, 6D, and 6E, less than 50 percent of all respondents in each group considered the auditing firm to be independent. The percentage of responses in the "Independent" category declined in each category as the stock ownership of the bank increased. The percentages of responses in the "Independent" category for Situation 6C were as follows: WPs, 22.4 percent; LKRs, 43.4 percent; and LWPs, 24.1 percent. The response rates for Situation 6D were: WPs, 15.9 percent; LKRs, 32.1 percent; 1412 TABLE 15 Analysis of Responses to Situation 6 WPs LKRs LWPs I 8 I 8 fl % Situation 6A Independent 61 57.0 42 79.2 19 65.5 Not independent 46 43.0 11 20.8 _19 34.5 Total 107 100.0 53 100.0 29 100.0 = ==I= =- = Situation 68 Independent 53 49.5 35 66.0 15 51.7 Not independent 54 50.5 18 34.0 .15. 48.3 Total =10=7, 100.0 13.3: 10.0 100.0 Situation 6C Independent 24 22.4 23 43.4 7 24.1 Not independent 83 77.6 _39 56.6 _23_ 75.9 Total 107 100.0 .2; 100.0 29 100.0 Situation 6D Independent 17 15.9 17 32.1 S 17.2 Not independent ._29 84.1 36 67.9 .33. 82.8 Total 107 100.0 53 100.0 .23 100.0 Situation 65 Independent 12 11.2 14 26.4 4 13.8 Not independent 95 88.8 39 73.6 _25 86.2 Total 107 100.0 53 100.0 _23 100 0 Situation 6A - Mean 0.570 0.792 0.655 Situation 68 - Mean 0.495 0.660 0.517 Situation 6C — Mean 0.224 0.434 0.241 Situation 60 - Mean 0.159 0.321 0.172 Situation 6E - Mean 0.112 0.264 0.138 Probability of no consensus (p): Situation 6A 0.3421 <0.0001 0.1360 Situation 68 0.6867 0.0270 0.9999 Situation 6C <0.0001 0.4101 0.0081 S;'.ation 6D <0.0001 0.0127 0.0005 Situation 6E <0.0001 0.0008 0.0001 Chi Square Test: 82 Significance Level Situation 6A 7.6724 0.0216 Situation 68 3.9999 0.1353 Situation 6C 7.9644 0.0186 Situation 60 5.9121 0.0520 Situation 65 6.2435 0.0441 143 and LWPs, 17.2 percent. For Situation 6E, only 11.2 percent of WPs considered the auditing firm to be independent, as did 26.4 percent of LKRs, and 13.8 percent of LWPs. As can be seen from these figures, the percentage of "Independent” responses are consistently the lowest for WPs, whereas the LKRs had the highest rate of "Independent" responses for all of these five auditor-client relationships. Conclusions from Statistical Tests The p-values obtained from applying the Binomial Test indicate that for Situations 6A and 6B, null hypotheses I and III, which state that there is no consensus among WPs and LWPs, respectively, concerning their perception of the concept of auditors' independence cannot be rejected. For LKRs, null hypothesis (II) of no consensus must be rejected for Situations 6A and 6B since the computed p-value obtained from the Binomial Test was less than alpha 8 0.05. For Situation 6C the results of the Binomial Test are exactly reversed. Thus, for this auditor—client relationship null hypotheses I and III must be rejected, whereas null hypothesis II, concerning LKRs perceptions of auditors' independence cannot be rejected. In applying the Binomial Test for the responses to Situation 6D and 6E, p-values were obtained that were all below the critical alpha level of 0.05. Thus, for these two auditor-client relationshps null hypotheses I, II, and III which state that there is no consensus regarding the perceptions of auditors' independence within the groups of WPs, LKRs, and LWPs, respectively, must be rejected. The Chi Square Test of Homogeneity was applied to test 144 null hypothesis VI which states that there are no differences regarding the perceptions of auditors' independence between WPs, LKRs, and LWPs. The results of the Chi Square Test, as can be seen from Table 15, indicate that null hypothesis VI may be rejected for Situations 6A, 6C, and 68 since the computed x2- statistics correspond to a significance level which is less than the set alpha of 0.05. For Situations 6B and 6D the opposite conclusions are reached. Here the xz-statistics correspond to a significance level greater than alpha = 0.05, indicating that null hypothesis VI may not be rejected for these two situations. It should be noted that for Situations 6D and 6B the significance values are very close to 0.05, indicating that null hypothesis VI was barely rejected for Situation 6E and not rejected for Situation 6D. Bookkeeping and EDP Services Under this category, three situations were investigated, corresponding to questions 2, 3, and 5 of the questionnaire. Situation 7 - In addition to the audit, an accounting firm (Question 2) provided services for the client which in- cluded maintaining the journals and ledgers, making adjusting entries and preparing financial statements. The AICPA does not consider the auditors to be lacking inde- pendence if they prepare the financial statements and make bookkeeping and adjusting entries to the client's books. The SEC has ruled in the above case that the auditing firm will not be considered independent under these circumstances. 145 The 1977 revision of the WPK Directives prohibits an auditor from performing these services for an audit client. The WPK in response to this question interpreted their rule accordingly.17 Priortx>the 1977 revision, the Directives did not explicitly prohibit preparation of an audit client's financial statements. Lavin's research findings indicate that for the AICPA members in his sample, only 36 percent of those that responded considered the auditing firm to be independent under these circumstances, whereas 55 percent of the loan officers and 53 percent of financial analysts sampled fell into the "Independent" category. As can be seen from Table 16, only 41.7 percent of the WP5 responding considered the auditing firm to appear to be independent, as did 45.2 percent of all LWPs. However, among LKRs, 70.4 percent considered the auditing firm to be independent, which is a decisive majority. Conclusions from Statistical Tests The p-values obtained from applying the Binomial Test for WPs and LWPs exceed alpha = 0.05, indicating that the null hypotheses of no consensus within these two groups cannot be rejected. For LKRs, however, the computed p—value of 0.0038 is far below alpha = 0.05, which suggests that the null hypothesis of no consensus should be rejected. This implies that there is a statistically significant majority within this experimental group, which, as defined earlier, represents a consensus. As Table 16 indicates, the computed xz-statistic of 12.2484 is significant at alpha = 0.0022. Since this significance level 146 TABLE 16 Analysis of Responses to Situation 7 WPs LKRs LWPs # % # % # % Independent 45 41.7 38 70.4 14 45.2 Not independent 63 58.3 16 29.6 17 54.8 Total 198_ 100.0 ._§i 100.0 ._§l 100.0 Mean 0.417 0.704 0.452 Binomial Test: Probability of no consensus (p): 0.2179 0.0038 0.7201 Chi Square Test: x2 12.2482 Significance level = 0.0022 II N Degrees of Freedom is less than alpha 0.05, hypothesis VI, which states that there are no differences of perceptions between the three groups must be rejected. Thus the results of the Chi Square Test are consistent with those obtained from the Binomial Test. Situation 8 - In order to keep certain information con- (Question 3) fidential, the client had the accounting firm perform the following services in addition to the audit: (a) prepare the executive payroll (b) maintain selected general ledger accounts in a private ledger. The AICPA and SEC disagree about this situation since it involves bookkeeping services. The SEC considers the auditing firm to lack independence in appearance whereas the AICPA considers 147 the auditing firm to be independent. It is not clear whether the 1977 revision of the WPK's Directives could be definitely interpreted as disallowing the above described auditor-client relationship. The bookkeeping services provided in this case are somewhat limited in scope and thus, the Directives could possibly be interpreted as allowing such a relationship. Under the Directives in effect prior to December 1977, this situation seems to be clearly permissible. However, the WPK's interpretation of their own Directives consider the above situation to represent a relationship that is prohibited by the 1977 revision of the Directives.18 Lavin found that 59 percent of the CPAs that responded to his questionnaire considered the auditing firm to be independent, as did 67 percent of the loan officers and 57 percent of the financial analysts in his sample. As is shown in Table 17, 77.8 percent of the WP5 responding, as well as 81.8 percent of LKRs and 64.5 percent of LWPs who responded considered the auditing firm to be independent under these circumstances. Thus individual WPs, LKRs, and LWPs perceive this relationship differently than the Wirtschaftsprfiferkammer. Conclusions from Statistical Tests The p-values computed by applying the Binomial Test reveal that for WPs and LKRs the null hypotheses (null hypotheses I and II) must be rejected since the p-values for these two groups are far less than alpha = 0.05. Consequently, it can be concluded that there is a consensus within each of these two groups concerning 148 TABLE 17 Analysis of Responses to Situation 8 WPs LKRs LWPs # % # % # ° Independent 84 77.8 45 81.8 20 64.5 Not independent 24 22.2 10 18.2 11 35.5 Total 108 100.0 ._55 100.0 _31 100.0 Mean 0.778 0.818 0.645 Binomial Test: Probability of no consensus (p): <0.0001 <0.0001 0.1496 Chi Square Test: x2 = 3.4610 Significance level 0.1772 Degrees of Freedom 2 the perceptions of auditors' independence with regard to this particular issue. The Binomial Test for LWPs indicated no consensus within this group. Since the Binomial Test considers sample size, the smaller the sample the larger the proportion must be in order to reject the null hypothesis. Even though 64.5 percent in this case agreed that the auditing firm was considered to be independent, null hypothesis III could not be rejected for an alpha = 0.05. The computed xz—statistic of 3.461 is significant at alpha = 0.1772 which exceeds 0.05. This indicates that the null hypothesis VI of no differences regarding the perception of auditors' independence between the three experimental groups cannot be rejected. 149 Situation 9 - From the books of original entry, client (Question 5) personnel prepared printed tapes that could be read on an optical scanner and sent the tapes to the accountants' office. The accountants forwarded the tapes to a service bureau. The account- ants received the print-outs of the fin- ancial statements and general ledgers and sent them to the client. The accountants did not edit the input data prior to transmission to the service bureau. The accountants provided this service in addition to the audit. In this particular situation, the SEC has ruled that the auditors' independence would be adversely affected. The AICPA, however, considers the described service a purely mechanical function which in itself would not impair the auditors' independence. TABLE 18 Analysis of Responses to Situation 9 WPs LKRs LWPs # 8 # % # % Independent 101 94.4 49 92.5 28 90.3 Not independent 6 5.6 4 7.5 3 9.7 Total 152 AM .5}. 129-.9 __3_1_ 100-0 Mean 0.944 0.925 0.903 Binomial Test: Probability of no consensus (p): <0.0001 <0.0001 <0.0001 Chi Square Test: x2 = 0.6712 Significance level Degrees of Freedom 0.7078 2 150 The German auditor who looks for specific guidance as to how the Directives of the WPK or other regulations apply for this auditor-client relationship would find little help. Even the Spirit of the Directives seems to provide little guidance. Thus the auditor would have to ask himself if the described situation would be acceptable with regard to his independence status if he {were confronted with it. The WPK in response to this question indicated that this sit- uation would impair independence in appearance and consequently, is not permissible.19 Lavin's survey indicated that 86 percent of the CPAs responding to Situation 9 considered the auditors to be independent under those circumstances, as did 70 percent of the loan officers, and 63 percent of the financial analysts sampled. -As Table 18 shows, an overwhelming majority within each of the three groups sampled considered the independence of the auditors to be unaffected by the circumstances described. Of the WP5 who responded, 94.4 percent considered the auditors to be independent. 0f the LKRs and LWPs responding, 92.5 percent and 90.3 percent, respectively, indicated the same perceptions. These findings are surprising only in light of the WPK's conclusion concerning this question. The results are consistent with those obtained by Lavin. Conclusions from Statistical Tests Since such an overwhelming majority considered the auditors to be independent in this case, it is not surprising that the 151 p-values obtained from the Binomial Test are close to zero, indicating that null hypotheseslg II, and III must be rejected, and the alternative hypotheses, which state that there is a consensus among WPs, LKRs, and LWPs, respectively, may be accepted. The xz-value of 0.6912 corresponds to an alpha value of 0.7078 which exceeds alpha = 0.05. Thus, null hypothesis VI cannot be rejected, implying that there are no differences of perceptions regarding auditors' independence for the circumstances described. These findings are consistent with those obtained from the Binomial Test. Family Relationships In this category two auditor-client relationships were investigated, corresponding to questions 7 and 8 of the questionnaire. Situation 10 — A was the controller of Company Z. He was (Question 7) not an elected officer nor did he have any holdings in Company Z. A's brother, B, was a partner in the public accounting firm that audits Company Z'a books. However, Bwas not the partner in charge of the audit. The AICPA considers the accounting firm to be not independent if the audit is performed by members from the same office in which B works. If the audit is performed by auditors that belong to an office other than the one in which B works, the accounting firm's independence is not considered to be impaired. The SEC has ruled that under the circumstances described in Situation 10, an accounting firm cannot be considered to be independent. 152 Lavin's results show that a statistically significant majority of the experimental groups sampled considered the accounting firm to be independent under these circumstances, 58 percent of the CPAs responding, 78 percent of the loan officers and 69 percent of the financial analysts who responded to his survey. The WPK's Directives, as noted in the preceding chapter, do contain a warning that a close relationship between a leading em- ployee of an audit client, which could be that of a close relative, may cause an auditor's appearance of independence to be impaired.20 The WPK's response to this question was that the situation described is not prohibited under paragraph 164 of the Stockcorporation Law of 1965 and of paragraph 49 of the WP0, implying that the auditors are considered to be independent in appearance under these circumstances.21 The results of this survey, as summarized in Table 19, indicate general agreement with the WPK's interpretation of pertinent regulations. Eighty-five percent of the WP5 responding, 90.9 percent of the LKRs responding, and 83.9 percent of the LWPs who responded considered the auditing firm to be independent for this particular auditor-client relationship. Conclusions from Statistical Tests As summarized in Table 19, the p-values computed by applying the Binomial Test are all close to zero, indicating that the null hypotheses of no consensus within each group must be rejected. Consequently, the alternative hypotheses I, II, and III which state that there is consensus concerning the perception of 153 TABLE 19 Analysis of Responses to Situation 10 WRs LKRs LWPs # % # 9s # 95 Independent 91 85.0 50 90.9 26 83.9 Not independent 16 15.0 5 9.1 5 16.1 Total 107 100.0 55 100.0 31 100.0 Mean 0.850 0.909 0.839 Binomial Test: Probability of no consensus (p): <0.0001 <0.0001 0.0002 Chi Square Test: x2 = 1.2948 0.5234 Significance level 2 Degrees of Freedom auditors' independence within each of the three experimental groups may be accepted. The Chi Square Test revealed that the obtained xz-value of 1.2948 is significant at alpha = 0.5234. This implies that null hypothesis VI, which states that there are no differences of perceptions regarding the concept of auditors' independence between the three groups, cannot be rejected. Consequently, it cannot be refuted that the responses received from all three groups could all have come from one homogeneous population. Situation ll — A partner in a public accounting firm had (Question 8) a brother-in-law who was sales vice presi- dent for a recently acquired client. The brother-in-law was not directly involved in the financial affairs of the company 154 and the partner was not connected with the audit in any way. The SEC and the AICPA both consider independence not to be impaired under these circumstances, mainly because a sales vice president is not directly involved with the financial affairs of the company. Lavin's research indicates that most of the respondents to this survey agreed with this position. Eighty-eight percent of the CPAs responding, 93 percent of the loan officers, and 96 percent of the financial analysts who responded to this question considered there to be no impairment of auditors' independence under those circumstances. The WPK in response to this question also believed that the auditors' independence would not be impaired in this situation.22 The majority of the three experimental groups sampled agreed with the WPK's view. As Table 20 indicates, 96.3 percent of WPs, 96.4 percent of the LKRs, and 90.3 percent of the LWPs considered the auditors to be independent in this particular case. Conclusions from Statistical Tests Since the percentage of respondents in the "Independent" category for each experimental group was very similar, the stat- istical tests applied did not yield any unexpected results. The Binomial Test revealed p-values of nearly zero, indicating that the null hypotheses of no consensus within each group (null hypotheses I, II, and III) must be rejected. 155 TABLE 20 Analysis of Responses to Situation ll WPs LKRs LWPs # 9 # a # 9 Independent 104 96.3 53 96.4 28 90.3 Not independent 4 3 7 2 3 6 3 9 7 Total J____.__Q§ _l_09_2 ==535= 100.0 =3__l_ Lg Mean 0.963 0.964 0.903 Binomial Test: Probability of no consensus (p): <0.0001 <0.0001 <0.0001 Chi Square Test: x2 = 2.1174 Significance level = 0.3469 Degrees of Freedom = 2 The xz-statistic of 2.1174, as indicated in Table 20, proved significant at alpha = 0.3469. This suggests that hypothesis VI (no differences of perception between the three groups) cannot be rejected, since the significance level exceeds 0.05. Occupations With Conflicting Interest Two situations were investigated in this category corresponding to questions 4 and 14 of the questionnaire. Situation 12 - A partner in an accounting firm managed (Question 4) a building owned by an audit client. Both the SEC and the AICPA agree that this situation will render the accounting firm not independent. The majority of 156 respondents to Lavin's survey also considered independence to be impaired. Only 12 percent of the CPAs, 42 percent of the loan officers, and 30 percent of the financial analysts considered the accounting firm still to be independent. Since it was felt that this activity was, a priori, prohibited from being performed by a Wirtschaftsprfifer, the wording of the German questionnaire was changed. Instead of "partner", the German version uses "a member of the auditing staff with five years audit experience" to prevent a high nonresponse rate to this question. However, the professional organization (Wirt- schaftsprfiferkammer) interpreted "the management of a building" as management consulting work (Beratungstatigkeit) which is permitted for WPs and consequently considered independence not to be impaired.23 Table 21 summarizes the responses to Situation 12. As indicated, 77.8 percent of WPs, 70.9 percent of LKRs, and 80.0 percent of the LWPs responding also considered the auditors to be independent. Thus, the AICPA, SEC, and U.S. groups surveyed had one view of this auditor-client relationship whereas the German WPK and the German groups surveyed espoused the opposite view. Whether the change in the German translation had a significant impact on the three German experimental groups' responses cannot be determined. Conclusions from Statistical Tests The p-values obtained from applying the Binomial Test were all less than 0.05. Consequently, the null hypotheses of no consensus within each of the three groups must be rejected and 157 TABLE 21 Analysis of Responses to Situation 12 WPs LKRs LWPs # % # % # % Independent 84 77.8 39 70.9 24 80.0 Not independent 24 22.8 16 29.1 6 20.0 Total 108 100.0 55 100.0 30 100.0 Mean 0.778 0.709 0.800 Binomial Test: Probability of no consensus (p): <0.0001 0.0027 0.0014 Chi Square Test: x2 = 1.2347 Significance level = 0.5394 Degrees of Freedom = 2 the alternative hypotheses I, II, and III which state that there is consensus within each group can be accepted. Null hypothesis VI, which states that there are no differences in perception between the experimental groups could not be rejected since the xz-value obtained corresponds to a significance level of 0.5394 which exceeds the set alpha = 0.05 by a considerable margin. Thus it may be concluded that there are no differences of perceptions regarding auditors' independence between WPs, LKRs, and LWPs for this auditor-client relationship. Situation l3 - A partner in an accounting firm qual- (Question 13) ified as a lawyer) also acted as the general counsel for an audit client. He received fees for such legal ser- vices and, through the accounting 158 partnership, for accounting services rendered concurrently. The AICPA has ruled that independence would be impaired under these circumstances.24 The SEC's position is similar since it has ruled that an auditor cannot act as legal counsel to an audit client. The Wirtschaftsprfiferordnung considers the activity of providing legal advice compatible with the WP profession. The WPK's response to this question also reiterates this fact and concludes that auditors' independence is unaffected under the circumstances described for this auditor-client relationship.25 As Table 22 shows, 61.2 percent of WPs who responded to this situation also considered the auditors to be independent. However, only 44.4 percent of LKRs, and even fewer (36.7 percent) of the LWPs who responded shared this view. Apparently, users of financial statements take a stance in this situation that is opposite to that of individual WPs and the Wirtschaftsprfiferkammer. Thus, the German WPs and the WPK both seem to disagree with the position taken by the AICPA and the SEC. However, LKRs and LWPs tend to agree with the AICPA's and SEC's viewpoint. Conclusions from Statistical Tests As can be seen from Table 22, the p-values obtained by applying the Binomial Test all exceeded alpha = 0.05, indicating that the null hypotheses (I, II, and III) of no consensus within each group cannot be rejected. For WPs, the achieved significance level of 0.0774 exceeds the set alpha of 0.05 by a small margin. 159 TABLE 22 Analysis of Responses to Situation l3 WPs LKRs LWPs # % # % # % Independent 63 61.2 24 44.4 11 36.7 Not independent 40 38.8 30 55.6 19 63.3 Total 103 100.0 54 100.0 30 100.0 Mean 0.612 0.444 0.2005 Binomial Test: Probability of no consensus (p): 0.0774 0.4966 0.2005 Chi Square Test: x2 = 7.5202 .Significance level 0.0233 Degrees of Freedom 2 However, since the Binomial Test takes into account sample size, a smaller sample necessitates a larger majority in the "Independent" or "Not independent" category to prove statistically significant. Thus, even though the percentage in the "Not independent" category is 63.3 percent for the LWPs as compared to the WP5 "Independent" category of 61.2 percent, the p-value was 0.2005 for the LWPs as compared to 0.0774 for WPs. However, since both values exceeded alpha = 0.05, the conclusions reached are the same. The Chi Square Test showed results contrary to those obtained from the Binomial Test. Whereas the Binomial Test indicated no consensus for each of the three groups, the computed xz-value of 7.5202 corresponds to a probability level of 0.0223. Since this is less than alpha = 0.05, hypothesis VI must be rejected and 160 it may be concluded that there are differences between WPs, LKRs, and LWPs concerning their perceptions of auditors' independence for the circumstances described in Situation 13. Business and Other Similar Relationships Four situations were investigated in this category corresponding to questions 1, 9, l6 and 17 of the questionnaire. Situation l4 - An accounting firm had its office in a (Question 1) building which was owned by a client. The accounting firm occupied approxi- mately 25 percent of the available office space in the building, and the client occupied the remainder. Both the SEC and the AICPA agree that an accounting firm cannot be considered independent under those circumstances. Lavin's research indicates, however, that a majority in each of the three groups that responded to this question perceived auditors' inde- pendence not to be impaired.‘ Among the CPAs questioned, 68 percent thought independence was unimpaired as did 61 percent of the loan officers and 60 percent of the financial analysts who responded. German regulations do not specifically mention this type of relationship. The WPK in its response to this question considered the circumstances alone not significant enough to impair independence in appearance.26 Table 23 summarizes the responses received. Of the WP- respondents, 75.9 percent considered the auditing firm to be independent. A similar proportion of LKRs and LWPs also considered 161 TABLE 23 Analysis of Responses to Situation 14 WPs LKRs LWPs # % # % # % Independent 82 75.9 39 70.9 23 74.2 Not independent 26 24.1 16 29.1 8 25.8 Total :2: 100.0 i=2; 100.0 31 100.0 Mean 0.759 0.709 0.742 Binomial Test: Probability of no consensus (p): <0.0001 0.0027 0.0107 Chi Square Test: x2 = 0.4795 Significance level = 0.7868 Degrees of Freedom = 2 the appearance of independence not to be impaired, 70.9 percent and 74.2 percent, respectively. Conclusions from Statistical Tests The Binomial Test revealed that the majority in each group who considered the auditing firm to be independent was statistically significant for the set alpha = 0.05. As Table 23 indicates, the p-values obtained were all below the 0.05 level. Thus, null hypotheses I, II, and III, which state that there is no consensus within each of the three experimental groups, must be rejected. The Chi Square Test supported the findings of the Binomial Test since the computed xz-value of 0.4795 corresponds to a sig- nificance level of 0.7868 which exceeds alpha = 0.05 by a wide 162 margin. Thus, null hypothesis VI (no differences of perceptions of auditors' independence between the three groups) cannot be rejected. As a matter of fact there is better than a 78 out of a 100 chance that null hypothesis V1 is true. Situation lS — An accounting firm rented block time (Question 9) on its computer to a client when the client's computer became overburdened. This is a situation in which the AICPA and the SEC have taken different positions. The AICPA considers these circumstances by themselves not to be sufficient to impair auditors' independence. The SEC believes that auditors' independence in appearance is impaired and thus ruled accordingly by prohibiting this auditor— client relationship. Lavin found that most respondents in his sample considered the accounting firm to be independent. Eighty-eight percent of the CPAs, 85 percent of the loan officers, and 87 percent of the financial analysts who responded to Lavin's survey agreed with the position taken by the AICPA. This type of situation is not specifically covered by any laws or regulations governing the conduct of WPs. In its response to this particular question, the WPK noted that the described circumstances by themselves are not sufficient to impair the auditors' independence status. They also noted that renting computer time to an audit client generally is no reason to prohibit the auditor from performing the audit.27 The results of the responses to this situation are summarized 163 TABLE 24 Analysis of Responses to Situation 15 WPs LKRs LWPs # % # 9 # % Independent 97 89.8 52 94.5 9 93.5 Not independent 11 10.2 3 5.5 2 6.5 Total 108 100.0 55 100.0 31 100.0 Mean 0.898 0.945 0.935 Binomial Test: Probability of no consensus (p): <0.0001 <0.0001 <0.0001 Chi Square Test: X2 = 1.2350 Significance level 0.5393 Degrees of Freedom 2 in Table 24. Apparently, the majority of the three groups sampled also perceived the circumstances as not to impair the auditors' appearance of independence. Eighty-nine and eight-tenths percent of the WP5, 94.5 percent of the LKRs, and 93.5 percent of the LWPs responding to this situation were in the "Independent" category. These results seem to support the position taken by the WPK concerning this auditor-client relationship. Conclusions from Statistical Tests The p-values computed by applying the Binomial Test all were close to zero, indicating that the null hypotheses which state that there is no consensus within each of the three groups must be rejected. Thus we can conclude that there is a statistically 164 significant majority within WPs, LKRs, and LWPs concerning the perception of auditors' independence. The results of the Chi Square Test indicated that null hypothesis VI, which states that there are no differences of perception between the three groups sampled, cannot be rejected. As Table 24 shows, the computed xz-value of 1.2350 corresponded to a significance level of 0.5393, which is far in excess of the set alpha = 0.05. Situation l6 - A partner of an accounting firm was (Question 16) also a member of the Supervisory Board of Corporation L. Corporation L was one of the largest suppliers of Cor- poration.M. The accounting firm was engaged to perform the year-end audit of Corporation M: This situation is unique to the German business environment due to the different corporate structure of German business entities.28 This particular auditor-client relationship is not covered and thus, not prohibited, by paragraph 164 of the Stock— corporation Law of 1965. The 1977 revision of the WPK's Directives also does not specifically deal with this situation even though it does caution the Wirtschaftsprfifer that it is questionable to accept a Supervisory Board position in a corporation which has financial or other interrelationships with an audit client.29 The WPK, in response to this question, considered the above relationship to be one that does not adversely affect independence in appearance.30 As Table 25 shows, 61.7 percent of the WP5 who responded to the questionnaire considered the accounting firm to be independent, 165 TABLE 25 Analysis of Responses to Situation 16 WPs LKRs LWPs # ° # % # Independent 66 61.7 35 63.6 14 48.3 Not independent 41 38.3 20 36.4 15 51 7 Total 107 100.0 55 100.0 29 100.0 Mean 0.617 0.636 0.483 Binomial Test: Probability of no consensus (p): 0.0553 0.0581 0.9999 Chi Square Test: x2 2.0903 II C Significance level .3516 II N Degrees of Freedom as did 63.6 percent of the responding LKRs. However, only 48.3 percent of the LWPs considered the accounting firm to be independent under the circumstances described in Situation 16. Conclusions from Statistical Tests The Binomial Test resulted in p-values that all exceeded alpha = 0.05, indicating that there was no consensus within each of the three experimental groups and thus, null hypothesis I, II, and III cannot be rejected. It should be noted, as can be seen from Table 25, that for WPs and LKRs, the computed p-values are just barely larger than 0.05. However, for LWPs, the p-value is approximately one, indicating a near certainty that there is no consensus within the LWP group regarding the auditors' independence 166 for this auditor-client relationship. The Chi Square Test results indicated a xz-value of 2.0903 with a corresponding significance level of 0.3516, exceeding the set alpha of 0.05. Consequently, null hypothesis VI cannot be rejected. Thus, it can be concluded that there are no differences of perception regarding the concept of auditors' independence between WPs, LKRs, and LWPs. Situation l7 - A certain portion of an accounting firm's (Question 17) revenue consisted of audit fees from one particular client. Consider each of the following situations separately. The fees from this particular client represented approximately: A. 5 percent of total revenue B. 10 percent of total revenue C. 25 percent of total revenue D. 50 percent of total revenue E. 75 percent of total revenue The AICPA and the SEC so far have declined to take a definite stand on the issue of economic client-dependency. Both leave it to the individual auditor (or individual accounting firm) to decide what percentage of total revenue would impair his(its) independence status. As mentioned in Chapter Four, the British accounting institutions recommend 15 percent as a cut-off to their auditors. The WPK in its Directives touches on this subject but falls short of making specific recommendations. The Directives do warn, however, that in cases where the audit fees obtained from a client 167 consistently represent a significant part of the auditor's total revenue, the auditor might not be considered to be independent.31 In response to Situation 17A through 17E, the WPK explains that other circumstances must also be considered in making a judgment on the auditors‘ appearance of independence. Therefore, the guidelines were intentionally left vague to allow for other cir- cumstances such as if the auditor just started his own business or if he performed his profession as a hobby without much consid- eration about the fees.32 Table 26 summarizes the responses to these particular auditor- client relationships including the relevant statistics. For Situation 17A and 178 there is a large majority within each of the three groups that considered independence not to be impaired under these circumstances. For Situation 17A, 96.3 percent of the WP5, 94.5 percent of the LKRs and 100.0 percent of the LWPs fell into the "Independent" category. For Situation 178, the "Independent" responses were 91.5 percent for the WP5, 85.5 percent for the LKRs, and 83.3 percent for the LWPs responding to this situation. For Situation 17C the results are less unified. Whereas 52.4 percent of the WP5 considered the accounting firm still to be independent, only 30.9 percent of the LKRs, and 40.0 percent of the LWPs thought so. For Situation 17D and 17E the results are virtually the opposite of those obtained for Situation 17A and 178. For Situation 170, only 17.1 percent of the WP5, 7.3 percent of the LKRs, and 20.0 percent of the LWPs considered the accounting firm to be 1638 TABLE 26 Analysis of Responses to Situation 17 WPs LKRs LWPs I t I 8 fl % Situation 17A Independent 103 6.3 52 94.5 30 100.0 Not independent 4 3.7 _3_ 5.5 ___0 0.0 Total 107 l 0.0 55 100.0 30 199;0 Situation 178 Independent 97 1.5 47 85.5 25 83.3 Not independent 9 8.5 __§ 14.5 __§ 16.7 Total 106 1 0.0 55 100.0 30 100.0 E — — —==- = Situation 17C Independent 55 52.4 17 30.9 12 40.0 Not independent 50 7.6 _38 69.1 18 60.0 Total 105 100.0 55 100.0 30 100.0 Situation 170 Independent 18 17.1 4 7.3 . 6 20.0 Not independent _81 2.9 51 92.7 ‘_24 80.0 Total 105 100.0 55 100.0 .22 100.0 Situation 17E Independent 12 11.2 4 7.3 5 16.7 Not independent 95 8.8 51 92.7 _35_ 83.3 Total 107 100.0 55 100.0 30 100.0 — — — _ — a Situation 17A - Mean 0.963 0.945 1.000 Situation 178 - Mean 0.915 0.855 0.833 Situation 17C - Mean 0.524 0.309 0.400 Situation 170 - Mean 0.171 0.073 0.200 Situation 17E - Mean 0.112 0.073 0.167 Binomial Test: Probability of no consensus (p): Situation 17A ' <0.0001 <0.0001 <0.0001 Situation 17B <0.0001 <0.0001 0.0003 Situation 17C 0.9904 0.0065 0.3616 Situation 17D <0.0001 <0.0001 0.0014 Situation 17E <0.0001 <0.0001 0.0003 Chi quare Test: Situation 17A Situation 178 Situation 17C Situation 17D Situation 17E 1.6500 2.2282 7.0028 3.5838 1.7776 Significance level 0.4382 0.3282 0.0302 0.1666 0.4111 169 independent. In Situation 17E, 11.2 percent of the WP5, 7.3 percent of the LKRs, and 16.7 percent of the LWPs believed the firm was still independent. Thus it seems that there is little doubt among WPs and users of financial statements alike about auditor's independence in appearance if the audit fees from one client represents 10 percent or less, or 50 percent or more of total revenue. Conclusions from Statistical Tests Table 26 summarizes the relevant statistics. The p-values obtained from the Binomial Test were all less than alpha = 0.05 fer Situations 17A, 17B, 17D, and 17E. Thus, for these four separate situations, null hypotheses I, II, and III must be rejected and the alternative hypotheses, which state that there is a consensus within each group concerning their perception of auditors' independence, may be accepted. The p-values computed for Situation 17C were greater than 0.05 for WPs and LWPs indicating no consensus within each of these two experimental groups. Thus, null hypotheses I and III cannot be rejected. For LKRs, the obtained p-value was less than alpha = 0.05, indicating that for this group the null hypothesis (II) of no consensus must be rejected. The results obtained from applying the Chi Square Test are consistent with those obtained from the Binomial Test. For Situation 17A, 178, 17D, and 17B, null hypothesis VI, which states that there are no differences of perception concerning the auditors' independence between the three experimental groups, cannot be 170 rejected. The xz-values obtained all correspond to significance levels exceeding alpha = 0.05. For Situation 17C, the computed xz-value corresponds to a significance level which is less than alpha = 0.05. Consequently, fOr this situation the null hypothesis of no differences between the three groups must be rejected. Hypotheses IV, V, and VII These three hypotheses deal with a comparison of WP majority responses and the positions expressed by the AICPA (null hypothesis IV) and the SEC (nullihypothesis V). Null hypothesis VII states that there are no differences between the perceptions of WPs and CPAs concerning the concept of auditors' independence for a number of selected auditor-client relationships. Hypotheses IV and V Table 27 presents a comparison of the WP consensus responses with relevant AICPA and SEC rulings. As can be seen from Table 27, WPs disagreed on a significant number of auditor-client relationships with either the AICPA or the SEC or both. Table 28 lists the null hypothesis test results for alpha :_0.05. Inspection of Table 28 reveals that null hypothesis IV which states that there is a consensus among WPs' perceptions concerning auditors' independence that coincides with the position taken by the AICPA is rejected for 9 situations and not rejected for 6 situations. Situation 10 describes an auditor-client relationship where a partner of the accounting firm had a brother who was the controller of the 171 TABLE 27 the AICPA and the SEC Consensus response Comparison of Consensus Responses of WPs and Rulings of Relationship WPs AICPA SEC 1 Independent‘ Not independent Not independent 2 Independent Not independent Not independent 3 Not independent* Not independent Not independent 4 Independent’ Not independent Not independent 5A Independent Not independent Not independent 58 Not independent Not independent Not independent 5C Not independent Not independent Not independent 7 Not independent‘ Independent Not independent 8 Independent Independent Not independent 9 Independent Independent Not independent 10 Independent ** Not independent 11 Independent Independent Independent 12 Independent Not independent Not independent 13 Independent‘ Not independent Not independent 14 Independent Not independent Not independent 15 Independent Independent Not independent * Not a statistically significant consensus ** If the auditors are from a different office--Independent If the auditors are from the sane office--Not independent 172 TABLE 28 Summary of Testing Hypotheses IV, V, and VII for the Situations Investigated (Null Hypotheses Rejected at alpha 1 0.05) Type of Auditor- H2: IV Ho: V Ho: VIII Client Relationship Situation ( ICPA), (SEC) WPs vs. CPAs Financial Interest 1 rejected rejected not rejected 2 rejected rejected ** 3 rejected rejected ‘* 4 rejected rejected rejected SA rejected rejected ** 58 not rejected not rejected *‘ SC not rejected not rejected " Bookkeeping and EDP 7 rejected rejected not rejected 8 not rejected rejected rejected 9 not rejected rejected not rejected Family Relationships 10 ' rejected rejected 11 not rejected not rejected rejected Conflicting Occupations 12 rejected rejected rejected 13 rejected rejected '* Business Relationships 14 rejected rejected not rejected 15 not rejected rejected not rejected * If auditors are from a different office - don't reject Ho. If auditors are from the same office - reject H0. *‘ No data available for CPAs. 173 company to be audited. The partner in question was not in charge of the audit. The AICPA's position is that the accounting firm is considered to be independent only if the partner belongs to a different office not involved with the audit. Under these cir- cumstances, null hypothesis IV cannot be rejected. However, the accounting firm is not considered to be independent by the AICPA if the partner belongs to the same office that performs the audit. Under those conditions the null hypothesis must be rejected. Similar results were obtained for null hypothesis V. This null hypothesis, which states that there is a consensus among WPs whose perceptions regarding auditors' independence coincide with the position taken by the SEC, was rejected for 13 of the 16 applicable auditor—client relationships tested. The null hypothesis could not be rejected for 3 situations at a significance levelcfl?0.05. It should be noted that for three of the situations investigated where the AICPA had ruled the auditors to be independent whereas the SEC had ruled the opposite, a consensus of WPs agreed with the AICPA position. Hypothesis VII Null hypothesis VII states that there are no differences of perceptions between WPs and CPAs regarding the concept of auditors' independence. As noted earlier, the results obtained from Lavin's 1973 survey were used to test this hypothesis. Thus the null hypothesis could only be tested for those situations that were also investigated by Lavin. It should be noted that Lavin received 202 usable responses from CPAs representing a response Comparison of Majoritpresponses of WPs and CPAs 174 TABLE 29 Relationship Response WPs CPAs 1 Independent 54.2% 50.2% 4 Independent 54.7% Not independent 74.6% 7 Not independent 58.3% 64.4% 8 Independent 77.8% 58.7% 9 Independent 94.4% 85.9% 10 Independent 85.0% 57.7% 11 Independent 96.3% 87.6% 12 Independent 77.8% Not independent 88.1% 14 Independent 75.9% 68.2% 15 Independent 89.8% 88.0% 175 rate of 58 percent. Table 29 presents a comparison of majority responses of WPs and CPAs.‘ Inspection of Table 29 reveals that the same majority responses were obtained by both groups for 8 out of 10 situations. WPs arrived at a majority opinion that was opposite the majority opinion reached by CPAs in only 2 situations (Situa- tion 4 and 12). Situation 4 deals with auditors who invested in a corporation which held a franchise granted by an audit client. A majority of WPs, 54.7 percent (even though not a statistically significant majority) considered the accounting firm to be inde- pendent, whereas 74.6 percent of the CPAs responding to Lavin's survey considered the accounting firm's independence to be impaired. Situation 12 deals with a partner of an accounting firm who managed a building for an audit client. For this situation 77.8 percent of WPs fell in the "Independent" category, whereas an even higher proportion of CPAs, 88.1 percent fell into the "Not independent" category. These strongly opposing views may be partially explained, as was noted earlier, by the wording in the German translation which, to prevent a possibly high nonresponse rate to this question, changed "partner” to "a member of the audit staff with five years audit experience". However, it seems unlikely that this translation convention was solely responsible for causing such a difference in perceptions between WPs and CPAs. It appears that there would be differences in perceptions between WPs and CPAs for this situation even if the change in the translation had not been made. Although WPs' majority responses coincided with the majority responses obtained from CPAs in 8 out of 10 auditor-client relationships, 176 the degree of those majority responses between WPs and CPAs differed sufficiently to cause the Chi Square Test to show significant results for a number of situations. This indicates that there are statistically significant differences in perception of auditors' independent between WPs and CPAs. Besides the two situations where opposite majority opinions were obtained, the Chi Square Test also detected differences in the responses of WPs and CPAs for an additional 3 situations. Table 28 gives the results of the test of null hypothesis VII by applying the Chi Square Test of Homogeneity. In all three of these situations, the degree of consensus was consistently higher for WPs than for CPAs. Closer examination of Table 29 reveals that for all_of the 8 situations where both WPs' and CPAs' majority responses fell into the "Inde- pendent" category, the degree of consensus is consistently higher for WPs than for CPAs, even though there was statistical signifi- cance for 3 situations only. Apparently, WPs take a "softer" stance than CPAs in all the situations investigated for which CPAs' responses were available. Summary of Independence Decisions The survey results and analysis revealed that for most of the auditor-client relationships investigated WPs agreed with users of financial statements. Only for Situations 6B, 13, 17C did WPs disagree with both LKRs and LWPs. In Situation 6B, which involved simultaneous ownership by a bank of the auditing firm and its audit client, a slight majority of WPs considered the auditing firm to be not independent, whereas a majority of LKRs 177 and LWPs thought otherwise. However, only for LKRs was the majority statistically significant, indicating consensus. Similarly, in Situation l3, involving legal counseling by an auditor, a majority of WPs considered the accounting firm still to be independent, whereas a majority of LKRs and LWPs did not. For Situation 17C, which deals with an auditor-client relationship where the accounting firm derived 25 percent of its total revenue from audit fees from one client, WPs considered independence not to be impaired whereas a majority of LKRs and LWPs were of the opposite opinion. There were also a number of situations where LKRs and LWPs were of divided opinion and thus WPs agreed with only one of the two user groups. In only one situation (Situation 16) did WPs agree with LKRs but not with LWPs, whereas in three situations (1, SB, and 7) the majority of WPs agreed with the majority of LWPs but not with the majority of LKRs. Table 30 provides a summary of the results of the survey. As can be seen from Table 30,iJ1most of the situations investigated the three experimental groups each voiced the same majority opinion. As was seen earlier from Table 28, which summarizes the results of the auditor-client relationships also investigated by Lavin in 1973, WPs agreed with CPAs' perceptions in 8 out of 10 situations. Only in two situations did the WP5 responses differ from those obtained from CPAs by Lavin, namely Situation 4 and Situation 12. It was noted that for all 8 situations where both WPs' and CPAs' majority opinions were in the "Independent" category the degree of consensus was consistently higher fer WPs than for CPAs. The 178 TABLE 30 Summary of Consensus for 27 Auditor-Client Relationships Relationship Consensus Response WPs LKRs LWPs 1 Independent 54.2% 54. Not independent 61.8% 2 Independent 87.0% 98.1% 86. 9 3 Not independent 54. % 50.9% 58. 4 Independent 54.7% 60.0% 65. 6 5A Independent 75.5% 89.1% 90. 5B Independent 56.4% Not independent 68.9% 53. ° 5C Not independent 79.4% 72.7% 83. 6A Independent 57. % 79.2% 65. 68 Independent 66.0% 51. Not independent 50.5% 6C Not independent 77.6% 56.6% 75. 60 Not independent 84.1% 67. % 82. 6E Not independent 88.8% 73. % 86. 7 Independent 70.4% Not independent 58.3% 54. / 8 Independent 77.8% 81.8% 64. ° 9 Independent 94.4% 92. % 90. 10 Independent 85.0% 90.9% 83. 11 Independent 96.3% 96.4% 90.3 12 Independent 77.8% 70. % 80. / 13 Independent 61.2% Not independent 55.6% 63. 14 Independent 75.9% 74.2% 70. 15 Independent 89.8% 94.5% 93. 16 Independent 61.7% 63.6% Not independent 51. 17A Independent 96.3% 94.5% 100. 178 Independent 91.5% 85.5% 83. 17C Independent 52.4% Not independent 69.1% 60. 17D Not independent 82.9% 92.7% 80. 17E Not independent 88.8% 92.7% 83. 179 difference proved significant for 3 out of those 8 situations at an alpha level of 0.05. The comparison of majority responses by WPs with AICPA and SEC rulings revealed that WPs tended to disagree with these rules for a significant number of situations. Out of a total of 11 separate situations for auditor-client relationships where both the SEC and AICPA are of the same opinion, WPs disagreed in 7 and agreed in 4 situations. In situations where the AICPA and SEC are of divided opinion, WPs agreed with the position of the AICPA on four occasions and with the SEC position on one occasion. For Situation 10, WPs disagreed with the SEC position and disagreed with the AICPA "home office" rule. In this particular case, the WP5 agreed with the AICPA's "other office" rule. As was described in the analysis, not all of the majority opinions were statistically significant. Tables 28 and 31 provide a summary of the results obtained from the hypothesis tests. This summary gives a concise view of the statistical test results of the null hypotheses tested at an alpha level of.: 0.05. Background Variables The impact of various background variables were investigated by performing a variety of statistical tests. The Chi Square Test of Homogeneity was employed to test whether there were significant differences in the responses received from WPs affiliated with the international "Big Eight" accounting firms and those WPs that were not affiliated with such firms. However, applying this test to each of the situations investigated showed no statistically 180 TABLE 31 Summary of Testing Hypotheses I, II, III, and V1 for the Situations Investigated (Null Hypotheses Rejected at alpha 1 0.05) Type of Auditor- Client Ho: I Ho: 11 H0: 111 HO: VI Relationship Situation (WPs) (LKRs), (LWPs) (No differences) Financial Interest 1 not rejected not rejected not rejected not rejected 2 rejected rejected rejected not rejected 3 not rejected not rejected not rejected not rejected 4 not rejected not rejected not rejected not rejected 5A rejected rejected rejected rejected 58 rejected not rejected not rejected rejected 5C rejected rejected rejected not rejected 6A not rejected rejected not rejected rejected 68 not rejected rejected not rejected not rejected 6C rejected not rejected rejected rejected 60 rejected rejected rejected not rejected 6E rejected rejected rejected rejected Bookkeeping and EDP 7 not rejected rejected not rejected rejected 8 rejected rejected not rejected not rejected 9 rejected rejected rejected not rejected Family Relationships ' 10 rejected rejected rejected not rejected 11 rejected rejected rejected not rejected Conflicting Occupations 12 rejected rejected rejected not rejected 13 not rejected not rejected not rejected rejected BusinessRelationships l4 rejected rejected rejected not rejected 15 rejected rejected rejected not rejected 16 not rejected not rejected not rejected not rejected 17A rejected rejected rejected not rejected l7B rejected rejected rejected not rejected 17C not rejected rejected not rejected rejected 17D rejected rejected rejected not rejected l7E rejected rejected rejected not rejected 181 significant differences between the two groups. Since there were only eleven WPs among the respondents who belonged to "Big Eight" accounting firms, the results of the Chi Square Test should be interpreted cautiously since the sample may not have been large enough to identify significant differences between the two groups, if there were any differences. However, the Chi Square Test of Homogeneity was also employed to test for significant differences between WPs belonging to auditing firms that were also involved with the audit of subsidiaries of U.S. companies, and WPs who belonged to auditing firms not involved with this type of audit. Table 32 indicates the responses to each situation presented to these two groups. There were 28 WPs affiliated with auditing firms that performed audits of U.S. subsidiary companies and 79 WPs belonging to auditing firms that were not involved with audits of U.S. subsidiary companies. The results of the Chi Square Test showed that the responses did not differ significantly between the two groups for most auditor-client relationships investigated. Only for Situation 5B did the computed xz-value prove to be significant for a set alpha of 0.05. Even though a majority of both groups considered the auditors involved not to be inde- pendent, the percentages differed significantly, 89.3 percent for WPs affiliated with auditing firms involved with audits of U.S. subsidiaries and 61 percent for WPs affiliated with auditing firms that were not involved with audits of U.S. subsidiaries. It could be concluded that, except for Situation 58, the perceptions of auditors‘ independence by WPs are not affected 1 82 TABLE 32 Comparison of Responses From WPs Associated with WPGs Involved in Auditing U.S. Subsidiary Firms (WPuS) with WPs Not Associated with Such WPGs (WPna). WPus WPna Situation # % % x2 a-level 1 Independent 12 42.9 45 57.7 Not independent 16 57.1 33 42.3 28 100.0 78 100.0 1.276 0.259 2 Independent 24 85.7 69 87.3 Not independent 4 14.3 10 12.7 28 100.0 79 100.0 0.011 0.915 3 Independent 9 32.1 40 50.6 Not independent 19 67.9 39 49.4 28 100.0 79 100.0 2.151 0.143 4 Independent 19 73.1 39 49.4 Not independent 7 26.9 40 50.6 26 100.0 79 100.0 3.540 0.060 5A Independent 18 66.7 61 78.2 Not independent 9 33.3 17 21.8 27 100.0 78 100.0 0.881 0.348 5B Independent 3 10.7 30 39.0 Not independent 25 89.3 47 61.0 28 100.0 77 100.0 6.348 0.012 5C Independent 2 7.1 20 25.6 Not independent 26 92.9 58 74.4 28 100.0 78 100.0 3.236 0.072 6A Independent 13 48.1 47 59.5 Not independent 14 51.9 32 40.5 27 100.0 79 100.0 0.643 0.423 68 Independent 11 40.7 41 51.9 Not independent 16 59.3 38 48.1 27 100.0 79 100.0 0.606 0.436 183 TABLE 32 (continued) , WPus na Situation % # % x2 a-level 6C Independent 6 22.2 18 22.8 Not independent 21 77.8 61 77.2 27 100.0 79 100.0 0.0425 0.837 60 Independent 4 14.8 13 16.5 Not independent 23 85.2 66 83.5 27 100.0 79 100.0 0.0106 0.918 6E Independent 3 11.1 9 11.4 Not independent 24 88.9 70 88.6 27 100.0 79 100.0 0.097 0.755 7 Independent 7 25.0 38 48.1 Not independent 21 75.0 41 51.9 28 100.0 79 100.0 3.629 0.057 8 Independent 20 71.4 64 81.0 Not independent 8 28.6 15 19.0 28 100.0 79 100.0 0.629 0.428 9 Independent 27 96.4 73 93.6 Not independent 1 3.6 5 6.4 28 100.0 78 100.0 0.007 0.936 10 Independent 24 85.7 66 84.6 Not independent 4 14.3 12 15.4 28 100.0 78 100.0 0.028 0.866 11 Independent 28 100.0 75 94.9 Not independent 0 0.0 4 5.1 28 100.0 79 100.0 0.402 0.526 12 Independent 20 71.4 63 79.7 Not independent 8 28.6 16 20.3 28 100.0 79 100.0 0.414 0.520 184 TABLE 32 (continued) WPus WPna Situation # % # % x2 a-level 13 Independent 12 50.0 51 65.4 Not independent 12 50.0 27 34.6 24 100.0 78 100.0 1.246 0.264 14 Independent 20 71.4 61 77.2 Not independent 8 28.6 18 22.8 28 100.0 79 100.0 0.127 0.721 15 Independent 26 92.9 70 88.6 Not independent 2 7.1 9 11.4 28 100.0 79 100.0 0.076 0.784 16 Independent 13 48.1 52 65.8 Not independent 14 51.9 27 34.2 27 100.0 79 100.0 1.958 0.162 17A Independent 25 92.6 77 97.5 Not independent 2 7.4 2 2.5 27 100.0 79 100.0 0.317 0.574 178 Independent 22 81.5 74 94.9 Not independent 5 18.5 4 5.1 27 100.0 78 100.0 3.039 0.081 17C Independent 11 40.7 44 57.1 Not independent 16 59.3 33 42.9 27 100.0 77 100.0 1.550 0.213 17D Independent 6 22.2 12 15.6 Not independent 21 77.8 65 84.4 27 100.0 77 100.0 0.239 0.628 17E Independent 3 11.1 9 11.4 Not independent 24 88.9 70 88.6 27 100.0 79 100.0 0.097 0.755 185 by whether or not the auditing firm with which a WP is affiliated performs audits of U.S. subsidiaries. The same Chi Square Test was employed to test for differences in accounting firm affiliation. Table 33 presents the four cate- gories in which the WP responses were grouped. As can be seen from Table 33, 31.1 percent of the respondents had their own practice but were also associated with other accounting firms, and 3.9 percent belonged to an association that audits cooperatives (Priifungsverband).33 Table 33 also compares the breakdown of the sample to the breakdown of the entire WP profession. The Chi Square Test excluded those WPs who belonged to a Prfifungsverband due to the small number in this category. The results of this test proved significant for Situation 170 only. Even though a majority of all three groups of WPs agreed that the accounting firm under the circumstances described is not considered to be independent, the response rate differed significantly. Of the WP5 who are sole practitioners, 91.7 percent fell in the "Not independent" category while 87.1 percent of Group 3 and only 69 percent of Group 2 came under the "Not independent" category. Thus for Situation 17D, one could conclude that a larger proportion of WPs practicing as sole practitioners, or as sole practitioners associated with other WPGs or accounting firms, considered auditors' independence to be impaired in Situation 17D (which describes an auditor-client relationship where approximately fifty percent of an auditing firm's total revenue consisted of audit fees from one client) than did WP respondents belonging to WPGs. At first sight, these findings appear somewhat inconsistent 186 TABLE 33 Type of Accounting Firm Affiliation of WP Respondents Respondents Population Group # % # % 1 Sole practitioner only 38 36.9 1,171 35.2 2 Accounting firm (WPG) only 29 28.1 1,196 36.0 3 Sole practitioner but also affiliated with WPG 32 31.1 895 26.9 4 Prfifungsverband 4 3.9 62 1.9 Total 103 100.0 3,324 100.0 TABLE 34 Significant Differences of Responses Due to AccountingpFirm Affiliation Group 1 Group 2 Group 3 Situation # % # g # g 170 Independent 3 8.3 9 31.9 4 12.9 Not independent 33 91.7 20 69.0 27 87.1 36 100.0 29 100.0 31 100.0 Chi Square Test: x2 = 6.4265 Significance level = 0.0402 Degrees of Freedom = 2 187 since sole practitioners may encounter this type of relationship more often than WPGs. However, the fact that most WPGs are auditing firms with no more than 3 or 4 WPs34 may indicate that this auditor- client relationship may occur as frequently among this group, or even more frequently, since many sole practitioners derive almost all of their revenue from tax work and accounting services and not from audit work. If one assumes that WPGs involved with audits of U.S. subsid- iaries are the larger WPGs, and analysis of the respondents in this category bears this out, then most of these WPGs would very likely not have any audit fees from any one client that approaches 50 percent of their total revenue. Table 32 seems to support this reasoning. As noted above, there were no statistically significant differences between WPs belonging to WPGs involved with audits of U.S. subsidiaries and WPs belonging to WPGs that were not, for Situation 170 as well as for most other auditor- client relationships investigated. Thus it may be concluded that the type of firm affiliation has no effect on WPs' perceptions of auditors' independence for most of the situations investigated. A Chi Square Test of Homogeneity was employed to test for significant differences between responses from WPs who performed audits and WPs who were not involved in audit work. Table 35 gives a summary of responses received from WPs to question B3.35 From this table it can be seen that the largest percentage of WPs were mainly involved in both audit and tax work (42.1 percent), followed by tax work (14 percent) and audit work (13.1 percent). To apply the Chi Square Test, these eleven groups (none 188 TABLE 35 Breakdown of WP Respondents by Area(s) of Professional Emphasis # % 1. Audit 14 13.1 2. Tax 15 14.0 3. Management Consulting 0 0.0 4. Other Services 3 2.8 5. Audit and Tax 45 42.1 6. Audit, Tax, and Management Consulting 12 11.2 7. Audit and Management Consulting 3 2.8 8. Audit, Tax, and Other Services 4 3.7 9. Audit and Other Services 5 4.7 10. Tax and Management Consulting 4 3.7 11. Tax and Other Services 1 0.9 12. Management Consulting and Other Services 1 0.9 Rounding 0.1 0 Total 107 100. of the WP responses fell into the Management Consulting only category) were collapsed into two categories, one group representing those responses from WPs indicating audit as at least one of their main areas of professional emphasis, and another group of those WPs responding who did not indicate auditing as an area of professional emphasis. The results of the Chi Square Test did not show any statis- tically significant differences between the two groups at an alpha level of 0.05 for any of the situations presented. Thus one could conclude that involvement with auditing work has no effect on WPs' perceptions of auditors' independence for the situations presented. In order to test whether the respondents' years of experience 189 in their current occupation affected their responses, a Pearson Correlation Test was performed for WPs, LKRs, and LWPs. To perform this test, any response in the "Independent" category was set equal to one, whereas a response in the "Not independent" category was set equal to zero. Thus, a positive correlation with years of experience for a particular situation would indicate that the more experience the respondent had the more he tended to consider the auditors to be independent in a given situation. A negative correlation would indicate the Opposite. Table 36 presents the various correlation coefficients for the three experimental groups for each of the situations investigated as well as the corresponding significance level. For the WP responses the computed correlation coefficient proved to be significant at alpha level of_: 0.05 for Situations l, 10, and 11. Situation 1 depicts an accounting firm which received a promissory note in payment of its audit fee. Situations 10 and 11 both involve an auditor who had a close relative in a leading position at a client firm. Apparently, since the correlation was negative for Situations 10 and 11, the more experience a WP has the more he considers this situation as one that impairs auditors' independence. For LKRs,the correlation coefficients proved significant for four situations, Situations SB, 5C, 6D, and 6E. For all four situations, a positive correlation was found, indicating that the more experience an LKR had the more he considers the auditors to be independent in these situations. Situations SB and 5C deal with auditors who owned shares of an audit client. Situations 6D and 6E represent a relationship in which a bank owned a significant 190 TABLE 36 Pearson Correlation Coefficient for Years of Experience WPs LKRs LWPs Situation P a-level P a-level P a-level 1 0.1622 0.048* 0.0282 0.420 0.1435 0.233 2 -0.0809 0.203 -0.1793 0.099 0.0644 0.372 3 0.0580 0.276 0.1140 0.206 0.0414 0.419 4 -0.0498 0.306 0.0401 0.387 0.3377 0.042* 5A 0.0175 0.429 -0.0546 0.347 0.2388 0.111 5B 0.0209 0.416 0.2301 0.047* 0.2774 0.076 5C -0.0740 0.225 0.3584 0.004* 0.0357 0.428 6A -0.1223 0.105 0.0812 0.282 0.3240 0.050* 68 -0.0239 0.403 0.0614 0.331 0.2757 0.082 6C —0.0765 0.217 0.2174 0.059 0.2072 0.150 60 -0.0614 0.265 0.2289 0.050* 0.4215 0.014* 6E ~0.0118 0.452 0.2497 0.036* 0.3852 0.024* 7 0.0566 0.280 0.1317 0.174 -0.1052 0.297 8 0.0466 0.316 -0.2041 0.069 0.4082 0.016* 9 0.0949 0.165 -0.1320 0.175 -0.1512 0.221 10 -0.2217 0.011* -0.0179 0.449 -0.l356 0.246 11 -0.2372 0.007* -0.0638 0.323 -0.0265 0.447 12 -0.1239 0.101 -0.1332 0.169 -0.2593 0.096 13 -0.0333 0.369 0.0404 0.387 0.3554 0.032* 14 -0.1096 0.129 -0.1020 0.232 0.0892 0.326 15 0.0166 0.432 -0.0426 0.380 0.1831 0.176 16 -0.0394 0.344 0.1095 0.215 0.2757 0.082 17A -0.1083 0.133 0.0300 0.415 ** 178 -0.1433 0.071 0.0850 0.271 ~0.0312 0.437 17C -0.0719 0.233 0.1488 0.141 0.1105 0.288 17D -0.0991 0.157 -0.1026 0.230 0.3198 0.049* 17E -0.1108 0.128 -0.1026 0.230 0.2730 0.080 * Significant for alpha_<_0.05. ** Correlation coefficient could not be computed since all responses were in one category. 191 portion of the stock of an audit client and at the same time partially owned the auditing firm, 50 percent in Situation 6D and over 50 percent in Situation 6E. For LWPs, significant correlationships were found in 7 out of 27 separate situations. Three of these seven correlations proved barely significant at the set alpha level of 0.05. (See Table 36). For Situations 6D and 6E, there were also positive correlations for LWPs, as well as for LKRs, as mentioned above. The remaining five situations that had statistically significant correlations dealt with bookkeeping services (Situation 8), a business relationship (Situation 4), a relationship where a member of a WPG also acted as general counsel (Situation 13), a relationship where 50 percent of a WPG's total revenue consisted of audit fees from one client (Situation 17D) and finally, a relationship similar to Situations 6D and 6E (Situation 6A) which were described when correlations of LKRs were discussed. It should be noted that for all of these seven auditor—client relationships, the correlations were positive indicating that the more experience an LWP has the more likely he is to consider the auditors to be independent under the various circumstances described. However, the correlationships were not very strong in any of the situations. Table 37 and Table 38 give the responses to questions B2, B3, and B4 fer LKRs and LWPs, respectively.36 Most of the LKRs and LWPs were familiar with the audit work of WPs and considered auditors' independence to be of great importance. For LKRs and LWPs alike, a majority used audited financial 192 TABLE 37 Responses of LKRs to Questions B2, B3, and B4 82: How familiar arepyou with the audit work of WPs? Not familiar Very familiar l 2 3 4 5 Total Frequency 0 5 19 24 6 54 Percentage 0.0 9.3 35.2 44.4 11.1 100.0 B3: How impgrtant dogyou consider the independence of auditors to be? Not important Very important 1 2 3 4 5 Total Frequency 0 0 0 13 41 54 Percentage 0.0 0.0 0.0 24.1 75.9 100.0 B4: What percentage of your lending decisions involve the use of audited financial statements? 0% 1-25% 26-50% 51-75% 76-100% 1 2 3 4 5 Total Frequency 0 12 9 15 18 54 Percentage 0.0 22.2 16.7 27.8 33.3 100.0 193 TABLE 38 Responses of LWPs to Questions 82, B3, and B4 82: How familiar are you with the audit work of WPs? Not familiar Very familiar l 2 3 4 5 Total Frequency 0 5 8 10 6 29 Percentage 0.0 17.2 27.6 34.5 20.7 100.0 83: How important do you consider the independence of auditors to be? Not important Very important 2 3 4 5 Total Frequency 0 0 1 6 23 30 Percentage 0.0 0.0 3.3 20.0 76.7 100.0 84: What percentage of your investment decisions involve the use of audited financial statements? 0% 1-25% 26—50% 51-75% 76-100% 1 3 4 5 Total Frequency 1 4 3 7 12 27 Percentage 3.7 14.8 11.1 25.9 44.5 100.0 194 statements as input for more than half of all their financial decisions.37 Only one respondent among LKRs and LWPs did not use audited financial statements for making financial decisions. Based on these findings it cannot be denied that LKRs and LWPs present a group that does use financial statements audited by WPs in their financial decision making process. Based on the responses to questions 82, B3, and 84, the responses of LKRs and LWPs to the various situations presented were grouped into the different categories for each of the three questions. A separate series of Chi Square Tests was applied for the responses to questions 82, 83, and 84 for both, LKRs and LWPs, to determine if there were significant differences in perception of auditors independence between the categorized groups. To allow for a more meaningful test, the categories, where necessary, were collapsed into three groups. Thus, for question 82, category and 2 were collapsed into one group, and category 4 and 5 were collapsed into another group. Category 3 was left intact. The same procedures were employed for question 84. For question 83 responses fell into only three groups (two groups for LKRs) making these modifying procedures unnecessary. The results of the Chi Square Test proved statistically insignificant for most situations. Tables 39 and 40 list the responses for those situations where statistically significant differences were found between the categorized responses for LKRs and LWPs, respectively. For LKRs question 82 categorization proved significant at alpha = 0.05 for Situation 3. Categorization of question 84 was significant for Situation 10. As is shown in Table 40, the 195 only significant grouping for LWPs that displayed statistically significant differences in perceptions of auditors' independence was categorization of question 83 for Situation 17E. However, the low value in some of the cells makes this result somewhat suspect. In sum, for the overwhelming majority of situations presented, the degree to which users of financial statements were familiar with the WP5 audit work (question 82), or the importance they attached to auditors' independence (question 83) or the frequency of their use of audited financial statements (question 84) had no effect on their perceptions of auditors' independence. Financial Decisions The two financial statement user groups, LKRs and LWPs, were asked not only about their perceptions of auditors' inde- pendence for the various situations presented in the questionnaire, but also how each described auditor-client relationship would affect their financial decisions. Financial decisions are defined as the lending decisions for LKRs and the investment decisions for LWPs. As was explained in Chapter Four, the sample subjects were given a five-point scale ranging from 1 to 5 to answer each question. A "1" represents an auditor-relationship which has a very negative impact on financial statement users' financial decisions whereas a "5" would indicate a very positive impact on the financial decisions of these two groups of financial statement users. There are a great many variables and factors that may influence 196 TABLE 39 LKR Responses to Questions 82 and 84 to Selected Situations Question 82 Degrees of Freedom = 2 Response category 1/2 3 4/5 Total Situation 3 Independent 0 8 18 26 Not independent _5_ ll 12 28 Total 5 19 30 54 Chi Square Test: X2 = 6.6087 Significance level = 0.0367 Degrees of Freedom = 2 Question 84 Response category 1/2 3 4/5 Total Situation 10 Independent 10 6 33 49 Not independent 2 _;§ 0 5 Total 12 9 33 54 Chi Square Test: X2 = 10.3592 Significance level = 0.0056 Degrees of Freedom = 2 TABLE 40 LWP Responses to Question 83 to Selected Situations Response categorypfi 3 4 5 Total Situation 17E Independent 1 0 4 5 Not independent _2. _6_ 19 25 Total 1 6 23 30 Chi Square Test: x2 = 6.2087 Significance level = 0.0449 197 lenders and investors in making financial decisions. Perception of auditors' independence, which is investigated in this study, is only one of the factors. If it were found that perceptions of auditors' independence have no effect on the financial decisions of users of audited financial statements, it could be argued that auditors' independence is not a factor in the financial decision making model or is a factor having insignificant weight. In this case, the importance of auditors' independence may seem somewhat overstated in both the German and United States literature. Tables 41 and 42 present responses received from LKRs and LWPs, respectively. Table 43 presents a comparison of mean responses of LKRs and LWPs. As can be seen from Table 43, auditor-client relationships considered to be independent by LKRs and LWPs alike had a mean response ranging from 2.614 to 3.250. A response of 3.000 indicates no effect on the financial decision, either positive or negative. The mean responses for LKRs and LWPs who considered the auditor-client relationship to impair auditors' independence ranged from 1.000 to 2.667. Even though, a priori, it could be argued that a decision maker who considers a given auditor-client relation- ship to impair the auditors' independence would not consider their relationship to be one that influences his financial decision positively, some respondents indicated just that. For Situations 6A through 68, a few respondents considered the auditing firm to lack independence but stated that their financial decisions would be positively affected. These situations all involved a bank that owned stocks of both the auditing firm and its audit client. 198 Perhaps the fact that the bank had invested capital in the audit client firm is a signal to those few respondents that the stock of this firm is a good investment regardless of the auditors' independence status. Table 44 summarizes the results of testing hypotheses VIII and IX. Null hypotheses VIII (IX) state that LKRs (LWPs) percep- tions regarding the concept of auditors' independence have no effect on their financial decisions. To test null hypothesis VIII, mean responsescdeKRs on the effect of their perceptions of auditors' independence on their financial decisions were computed for LKRs whose responses fell into the "Independent" category and for LKRs whose responses fell into the "Not independent" category for each of the situations investigated. Thus, two means were computed for each situation. The t-Test was applied to detect significant differences between the two means for each individual situation. The same procedure was employed with LWPs to test null hypothesis IX. For LKRs the t-values obtained by applying the t—Test to the mean responses of both categories, "Independent" versus "Not inde- pendent", were mostly associated with probability values far less than alpha = 0.05. Only for Situation 17A did the significance level exceed 0.05. Thus, for 26 of the 27 separate auditor-client relationships, the t-Test proved statistical significance, implying that null hypothesis VIII, which states that LKRs perceptions regarding the concept of auditors' independence have no effect on their lending decision, must be rejected. For LWPs the results of the t-Tests applied to each individual 199 situation revealed that for seven auditor-client relationships there was no effect of LWPs' perceptions of auditors' independence on their investment decision. From Table 44 it can be seen that Situations 2, 3, 5A, 5C, 6D, 10, and 15 had t-values with correspond— ing probabilities exceeding the set alpha level of 0.05. For Situation 17A the t-statistic could not be computed since all LWPs considered the accounting firm to be independent in Situation 17A. For the remaining nineteen situations LWPs' investment decisions were affected significantly by their perceptions of auditors' independence. It should be pointed out that four of the seven auditor client relationships in which LWPs perceptions of auditors' inde- pendence did not affect their investment decisions dealt with situations where auditors had a financial interest in their audit clients. Apparently, this affected their perceptions of auditors' independence to the extent that they made a judgment in this category, but the circumstances described were not such as to significantly affect their investment decisions. The other three auditor-client relationships involved the renting of computer time by auditors to their client, a situation in which a brother-in-law of one of the members of the accounting firm was the controller for the audit client and the situation where a bank owned shares of corporation as well as 50 percent of the shares of their auditors' firm. Apparently, investors did not consider these situations to be significant enough to have an effect on their investment decisions, whereas LKRs all considered them to have an effect on their lending decision. Analysis of Lending Decision 200 TABLE 41 Impact on Lending Decision Very Very Negative Positive Situation 1 2 3 4 5 Total* 1 Frequency 15 22 14 4 0 55 Percentage 27.3 40.0 25. 7. 0.0 100.0 2 Frequency 1 2 49 l l 54 Percentage 1.9 3.7 90. 1. 1.9 100.0 3 Frequency 9 24 20 1 l 55 .Percentage 16.4 43.6 36. 1. 1.8 100.0 4 Frequency 3 20 28 4 0 55 Percentage 5.5 36.4 50. 7. 0.0 100.0 5A Frequency 1 5 48 0 l 44 Percentage 1.8 9.1 87. 0. 1.8 100.0 58 Frequency 5 25 23 1 1 55 Percentage 9.1 45.5 41. 1. 1.8 100.0 5C Frequency 12 30 10 3 0 55 Percentage 21.8 54.5 18. 5. 0.0 100.0 6A Frequency 4 7 36 4 l 52 Percentage 7.7 13.5 69. 7. 1.9 100.0 68 Frequency 6 13 29 4 l 53 Percentage 11.3 24.5 54. 7. 1.9 100.0 6C Frequency 10 20 18 3 2 53 Percentage 18.9 37.7 34. 5. 3.8 100.0 60 Frequency l6 l6 l6 3 8 53 Percentage 30.2 30.2 30. 5. 3.8 100.0 6E Frequency 20 l4 l4 2 3 53 Percentage 37.7 26.4 26. 3. 5.7 100.0 7 Frequency 4 14 18 16 3 55 Percentage 7.3 25.5 32. 29. 5.5 100.0 8 Frequency 0 ll 37 5 l 54 Percentage 0.0 20.4 68. 9. 1.9 100.0 201 TABLE 41 (continued) Impact on Lending Decision Very Very Negative Positive Situation 1 2 3 4 5 Total* 9 Frequency 0 4 45 3 1 53 Percentage 0. 7. 84.9 5. 1.9 100.0 10 Frequency 0 4 49 2 0 55 Percentage 0. 7. 89.1 3. 0.0 100.0 11 Frequency 0 1 53 0 l 55 Percentage 0. 1. 96.4 0. 1.8 100.0 12 Frequency 2 17 34 l 1 55 Percentage 36 30. 61.8 1. 1.8 100.0 13 Frequency 7 20 22 4 1 54 Percentage 13. 37. 40.7 7. 1.9 100.0 14 Frequency 0 17 35 2 l 55 Percentage 0. 30. 63.6 3. 1.8 100.0 15 Frequency 0 6 48 0 1 55 Percentage 0. 10. 87.3 0. 1.8 100.0 16 Frequency 1 14 30 8 2 55 Percentage l. 25. 54.5 14. 3.6 100.0 17A Frequency 0 3 48 l 1 53 Percentage 0. 5. 90.6 1. 1.9 100.0 178 Frequency 0 12 40 1 1 54 Percentage 0. 22. 74.1 1. 1.9 100.0 17C Frequency 6 36 12 0 l 55 Percentage 10. 65. 21.8 0. 1.8 100.0 17D Frequency 29 21 3 1 1 55 Percentage 52. 38. 5.5 l. 1.8 100.0 178 Frequency 38 12 3 2 0 55 Percentage 69. 21. 5.5 3. 0.0 100.0 * Due to rounding, the total percentage may be slightly than 100 percent for a number of situations. more or less 202 TABLE 42 Analysis of Investment Decision Impact on Investment Decision Very Very Negative Positive Situation 1 2 3 4 5 Total* 1 Frequency 8 10 ll 0 0 29 Percentage 27.6 34.5 37. O. 0.0 100.0 2 Frequency 0 3 22 l l 27 Percentage 0.0 11.1 81. 3. 3.7 100.0 3 Frequency 4 8 ll 5 0 29 Percentage 14.3 28.6 39. 17. 0.0 100.0 4 Frequency 4 8 14 1 0 27 Percentage 14.8 29.6 51. 3. 0.0 100.0 5A Frequency 0 3 22 3 0 28 Percentage 0.0 10.7 78. 10. 0.0 100.0 58 Frequency 3 8 15 2 0 28 Percentage 10.7 28.6 53. 7. 0.0 100.0 5C Frequency 9 8 7 3 1 28 Percentage 32.1 28.6 25. 10. 3.6 100.0 6A Frequency 2 8 13 4 0 27 Percentage 7.4 29.6 48. 14. 0.0 100.0 68 Frequency 5 8 9 5 0 27 Percentage 18.5 29.6 33. 18. 0.0 100.0 6C Frequency 10 6 6 5 0 27 Percentage 37.0 22.2 22. 18. 0.0 100.0 60 Frequency 12 7 3 4 1 27 Percentage 44.4 25.9 11. 14. 3.7 100.0 6E Frequency 14 5 3 4 1 27 Percentage 51.9 18.5 ll. 14. 3.7 100.0 7 Frequency 6 6 ll 5 1 29 Percentage 20.7 20.7 37. 17. 3.4 100.0 8 Frequency 4 5 15 4 1 29 Percentage 13.8 17.2 51. 13. 3.4 100.0 203 TABLE 42 (continued) Impact on Investment Decision Very Very Negative Positive Situation 1 2 3 4 5 Total* 9 Frequency 0 2 23 3 0 28 Percentage 0. 7. 82.1 10.7 0.0 100.0 10 Frequency 0 3 24 2 0 29 Percentage 0. 10. 82.8 6.9 0.0 100.0 11 Frequency 0 3 24 1 l 29 Percentage 0. 10. 82.8 3.4 3.4 100.0 12 Frequency 0 5 22 1 l 29 Percentage 0. 17. 75.9 3.4 3.4 100.0 13 Frequency 4 12 11 0 1 28 Percentage 14. 42. 39.2 0.0 3.6 100.0 14 Frequency 2 3 22 2 0 29 Percentage 6. 10. 75.9 6.9 0.0 100.0 15 Frequency 0 2 26 0 1 29 Percentage 0. 6. 89.7 0.0 3.4 100.0 16 Frequency 2 7 l4 3 1 27 Percentage 7. 25. 51.9 11.1 3.7 100.0 17A Frequency 0 1 24 1 l 27 Percentage 0. 3. 88.9 3.7 3.7 100.0 178 Frequency 2 4 19 2 0 27 Percentage 7. 14. 70.4 7.4 0.0 100.0 17C Frequency 4 14 8 1 0 27 Percentage 14. 51. 29.6 3.7 0.0 100.0 17D Frequency 14 8 3 2 0 27 Percentage 51. 29. 11.1 7.4 0.0 100.0 17E Frequency 18 4 3 l 1 27 Percentage 66. 14. 11.1 3.7 3.7 100.0 * Due to rounding, the total percentage may be slightly more or less than 100 percent for a number of situations. 204 TABLE 43 Comparison of Means for Financial Decisions Number Mean of Number Mean of of LKRs' Lending of LWPs' Investment Situation Response Responses Decision Responses Decision 1 Independent 21 2.619 15 2.600 Not independent 34 1.824 14 1.571 2 Independent 53 3.019 24 3.042 Not independent 1 1.000 3 2.667 3 Independent 27 2.778 11 2.727 Not independent 28 1.821 16 2.500 4 Independent 33 2.970 18 2.889 Not independent 22 2.046 9 1.556 5A Independent 49 3.000 26 3.000 Not independent 6 2.166 2 3.000 58 Independent 31 2.871 13 2.923 Not independent 24 1.833 15 2.267 5C Independent 15 2.733 5 2.800 Not independent 40 1.825 23 2.130 6A Independent 41 3.122 18 3.167 Not independent 11 1.727 9 1.778 68 Independent 35 3.057 14 3.214 Not independent 18 1.833 13 1.769 6C Independent 23 3.000 7 3.286 Not independent 30 1.900 20 1.850 6D Independent 17 3.059 5 3.000 Not independent 36 1.833 22 1.864 6E Independent 14 3.149 4 3.250 Not independent 39 1.769 23 1.783 7 Independent 38 3.474 14 3.429 Not independent 16 1.875 15 1.867 8 Independent 44 3.068 18 3.333 Not independent 10 2.300 11 1.818 205 TABLE 43 (continued) Number Mean of Number Mean of of LKRs' Lending of LWPs' Investment Situation Response Responses Decision Responses Decision 9 Independent 49 3.082 27 3.074 Not independent 4 2.250 1 2.000 10 Independent 50 3.000 25 3.000 Not independent 5 2.600 4 2.750 11 Independent 53 3.038 26 3.077 Not independent 2 2.500 3 2.333 12 Independent 39 2.897 23 3.044 Not independent 16 2.125 5 2.400 13 Independent 24 3.125 10 3.000 Not independent 30 1.967 18 2.000 14 Independent 39 3.026 21 3.048 Not independent 16 2.125 8 2.250 15 Independent 52 2.981 27 3.037 Not independent 3 2.000 2 2.500 16 Independent 35 3.086 14 3.286 Not independent 20 2.650 13 2.231 17A Independent 50 3.020 27 3.074 Not independent 3 2.667 0 N/A 178 Independent 46 2.957 22 3.046 Not independent 8 2.125 5 1.600 17C Independent 17 2.824 10 2.900 Not independent 38 1.868 17 1.824 17D Independent 4 3.250 5 3.000 Not independent 51 1.490 22 1.455 178 Independent 4 3.000 4 3.250 Not independent 51 1.314 23 1.348 206 TABLE 44 Probabilities of Incorrectly Rejecting Null Hypotheses VIII and IX Null Hypothesis VIII Null Hypothesis IX Situation t-value (probability t-value Aprobability l 3.48 0.001 4.33 0.000 2 5.46 0.000 1.11 0.278 3 5.19 0.000 0.59 0.560 4 6.13 0.000 6.67 0.000 5A 4.72 0.000 0.00 1.000 58 6.78 0.000 2.37 0.025 5C 4.39 0.000 1.20 0.242 6A 8.19 0.000 6.91 0.000 68 6.67 0.000 5.27 0.000 6C 4.81 0.000 3.34 0.003 60 4.59 0.000 1.95 0.062 6E 4.51 0.000 2.30 0.030 7 7.16 0.000 5.27 0.000 8 4.10 0.000 6.03 0.000 9 3.94 0.000 2.74 0.011 10 2.72 0.009 1.11 0.278 11 2.58 0.013 2.48 0.020 12 4.55 0.000 2.33 0.028 13 6.28 0.000 3.46 0.002 14 6.74 0.000 3.43 0.002 15 4.55 0.000 1.63 0.115 16 2.02 0.048 3.77 0.001 17A 1.54 0.131 N/ * 178 4.77 0.000 7.16 0.000 17C 6.19 0.000 4.97 0.000 17D 4.89 0.000 4.25 0.000 178 5.16 0.000 4.14 0.000 * All responses were in one category. 207 TABLE 45 Mean Responses of Financial Decisions by LKRs and LWPs and Significance Levels Mean Response Mean Response Significance Situation LWPs LKRs t-value Level 1 2.103 2.123 0.12 0.906 2 3.000 2.982 0.16 0.873 3 2.607 2.291 1.56 0.123 4 2.444 2.600 0.89 0.374 5A 3.000 2.909 0.82 0.416 58 2.571 2.418 0.86 0.395 5C 2.250 2.073 0.83 0.410 6A 2.704 2.827 0.66 0.508 68 2.519 2.642 0.57 0.570 6C 2.222 2.377 0.63 0.532 60 2.074 2.226 0.57 0.569 6E 2.000 2.132 0.47 0.640 7 2.621 3.000 1.55 0.124 8 2.759 2.926 0.95 0.343 9 3.036 3.019 0.16 0.873 10 2.966 2.964 0.02 0.982 11 3.000 3.018 0.20 0.843 12 2.931 2.673 1.75 0.084 13 2.357 2.482 0.61 0.546 14 2.828 2.764 0.45 0.657 15 3.000 2.927 0.72 0.471 16 2.778 2.927 0.77 0.443 17A 3.074 3.000 0.74 0.459 178 2.778 2.833 0.39 0.694 17C 2.222 2.164 0.35 0.726 17D 1.741 1.618 0.60 0.549 178 1.630 1.436 0.94 0.352 208 Lavin, when confronted with similar results, theorized that time horizons of investors and lenders differ. He argued that an investor is usually more interested in the long-run. Since the independence problem tends to disappear in the long run, it would not affect the investment decision.38 Recall that Situation 17A was the only auditor-client relationship in which LKR's perceptions of auditor's independence did not affect their lending decision. However, since all LWPs believed that this situation would not impair auditors' independence, a t-value for LWPs could not be computed. Thus no comparison between LKRs and LWPs was possible for this case. To test whether there were any differences of mean responses between LKRs and LWPs, a t-Test was employed. As can be seen from Table 45, in none of the 27 separate auditor-client relationships did the t-Test show a statistically significant difference for an alpha level of :_0.05 between the mean responses of the two financial statement user groups. These results are consistent with those obtained by Lavin who found a statistically significant difference for only one of 12 separate auditor-client relationships investigated. The one relation- ship which proved significant at an alpha level of 0.02 involved a partner in an accounting firm who was a member of a stock club which owned an immaterial interest in an audit client. This particular relationship was one of two situations from Lavin's survey that were not investigated in this study due to nonapplicability to the German environment. 209 The following chapter presents a summary of this research. The conclusions and limitations of this study as well as suggestions for future research are discussed. 210 CHAPTER FIVE--FOOTNOTES Recall that the 10 auditor-client relationships used to test differences in perceptions between Wirtschaftsprfifer and Certified Public Accountants were taken from Lavin's questionnaire. Lavin conducted his research in 1973. See, Lavin, 0., "Financial Statement Users' and Accountants' Perceptions of the Independence of the Auditor in Selected Client-Auditor Relationships" (Unpublished Dissertation, University of Illinois, 1974). Appendices A, 8, and C contain copies of the original questionnaires in German that were mailed to the sample subjects. An English version of the questionnaires is also included in the same appendices as a reference for non-German readers. See Appendices A, 8, and C for a copy of the original questionnaire and the English translation of the questionnaires. See Frage 6, WPK's "Interpretations", Appendix D. The Wirtschaftsprfiferkammer provided this researcher with their interpretations of current regulations and laws as they apply to the auditor-client relationships investigated in this study during a meeting with Mr. Pfefferer of the WPK with this researcher on December 12, 1977. Apparently, the WPK received a number of requests from its members as to the "official" interpretation of the situations investigated, since two of the very late responding WPs included a copy of the WPK's "Interpretations" instead of answering the questionnaire individually. A copy of the WPK's "Interpreta— tions" is included in Appendix D, and is referred to throughout this chapter. Most of the AICPA and SEC rulings, or their positions con- cerning the auditor-client relationships investigated in this study, can be found in: Accounting Series Release No. 126 (Security and Exchange Commission, 1972); Rule 2-0113cgu1ation §;X, as cited in Rappaport, L. H., SEC Accounting Practice and Procedure -- Third Edition (New York: The Ronald Press Company, 1972), Chapter 26, p. 18; AICPA, Division of Pro- fessional Ethics, Summaries of Ethics Rulings, American Institute of Certified Public Accountants (1970); AICPA, Code of Professional Ethics; Concepts of Professional Ethics - Rules of Conduct - Interpretation of Rules of Conduct - (March 1975 Edition) American Institute of Certified Public Accountants (1975). Only those rulings not found in the above references will be referenced in this chapter. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 211 Auditors, auditor, accounting firm, auditing firm, Wirtschafts- prfifungsgesellschaft are all interchangeably used throughout this chapter. In this chapter, frequent reference is made to Lavin's research results, but will not be referenced each time with a footnote. Lavin discussed his research results in Chapter 4 of his dissertation. See Lavin, D., "Financial Statement User's and Accountants' Perceptions of the Independence of the Auditor...," (1974), pp. 102-157. By setting a response in the "Independent" category equal to l and a response in the "Not independent” category equal to 0, the mean response is identical to the percentage of those respondents in each of the three experimental groups who responded "Independent". As noted in Chapter Four, an alpha level of 0.05 is considered the cut-off between significant and not significant statis- tical results for this study. Thus, the various null hypotheses will not be rejected for any computed significance level which is greater than 0.05. See WPK's "Interpretations", Appendix D, Fragen 11 and 12. Ibid. Ibid., Frage 10. Wrabetz mentions some U.S. franchisers operating in Germany, for example, Coca Cola, Hertz and Avis, and also some franchises of German and/or European origin such as: Salamander Schuhshops; Rosenthal, WMF; "Wimpy Bars"; ”Wienerwald" - restaurants. See Wrabetz, W., "Das Franchise System--Wesen, Inhalt und Probleme, Betriebswirtschaftliche Forschung und Praxis (Heft 3, 1974), pp. 259-264. Wirtschaftsprfiferkammer, Richtlinien ffir die Berufsausfibung der Wirtschaftsprfifer und vereidigten Buchprfifer (December 1 1977), pp. 7-8. See WPK's "Interpretations", Appendix D, Frage 15. Ibid. Ibid., Frage 2. Ibid., Frage 3. Ibid., Frage 5. Wirtschaftsprfiferkammer, Richtlinien... (1977), p. 7. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 212 See WPK's "Interpretations", Appendix D, Frage 7. Ibid., Frage 8. Ibid., Frage 4. "AICPA Ethics Division Answers Members Queries on the Ethical Code," Journal of Accountancy (July, 1974), p. 62. See WPK's "Interpretations", Appendix D, Frage 13. Ibid., Frage 1. Ibid., Frage 9. See Footnote 26, Chapter Four, concerning the make up of the corporate board of directors of German corporations (Aktiengesellschaften). Wirtschaftsprfiferkammer, Richtlinien... (1977), p. 8. See WPK's "Interpretations", Appendix D, Frage 16. Wirtschaftsprfiferkammer, Richtlinien... (1977), p. 9. See WPK's "Interpretations", Appendix D, Frage 17. A Prfifungsverband is an organization that only audits cooperatives (Genossenschaften). For more detail, see Institut der Wirt- schaftsprUfer, WP-Handbuch 1977 (Ddsseldorf: IdW-Verlag, 1977), pp. 266-273. See Wirtschaftsprfiferkammer, WP-Verzeichnis 1976/77 (Onsseldorf: IdW-Verlag, 1977). See Appendices A, 8, and C for copies of the questionnaires used. See Appendices 8 and C for copies of the original questionnaires mailed to LKRs and LWPs, respectively. Some of the respondents indicated that the percentage usage of audited financial statements in their work also included those that were prepared by Certified Tax Consultants (Steuerberater). Lavin, D., pp. 150-151. CHAPTER SIX SUMMARY, CONCLUSIONS, LIMITATIONS, AND SUGGESTIONS FOR FUTURE RESEARCH The importance of the auditor's independence may only be equaled by the importance of his technical proficiency. In a highly complex and industrialized society such as Germany, the need for accurate financial information is of great importance to the society at large. The auditing profession has been recognized as playing a vital role by lending credibility to audited financial statements and thus helping to ensure a more efficient allocation of economic resources. This credibility has its foundation in the public's belief in the auditor's competence and ability to make objective and unbiased audit decisions. Thus the appearance of the auditor's independence is an all-important prerequisite to performing the audit function within a given economic environment. This study investigated German auditors' independence for a variety of different auditor-client relationships as perceived by Wirtschaftsprufer (WPs), and by certain groups of users of audited financial statements. In this chapter the results of this study are summarized and the conclusions reached are presented. In addition, various limitations and suggestions for future related research are discussed. 213 214 Summary The German accounting profession is discussed in Chapter Two by focusing on the organizational structure of the Wirtschaftsprfifer profession, as well as describing the professional duties and qual- ifications of WPs and the development and sources of accounting and auditing principles and standards. The German accounting profession is well organized and appears to consist of individual professionals having competency levels at least equivalent to American CPAs based on educational backgrounds, work experience and level of examinational requirements. It was also noted that the German accounting profession in comparison to many Western countries consists of a relatively small number of professionals, approximately 3500. Several reasons were presented to explain how the nation's audit needs could be satisfied with such a small group. These include the rather long work requirement before being allowed to take the WP examin- ation, the existence of related professions performing accounting services other than mandatory audits, and the relatively small number of business entities that must by law be audited by WPs. The relevant laws and regulations covering the conduct of all members of the WP profession were discussed briefly to provide the necessary background for a better understanding of the German accounting environment and the research findings. A review of the German accounting literature relevant to auditors' independence was presented in Chapter Three. It was noted that the German accounting profession distinguishes between independence in fact and independence in appearance on a basis 215 similar to that of the U.S. accounting profession. Both components of independence must be satisfied for a WP to be totally independent. The discussion of the German accounting literature also revealed that several circumstances seem to hinder the WP profession from achieving the goal of being considered truly independent from its audit clients, in the eyes of the public. Like the U.S. profession, German auditors recently have been suffering from a credibility loss, which was partially the result of some well-publicized corporate bankruptcies that seem to suggest questionable ethical conduct and that questionable auditing procedures were used by the auditors involved in these cases. Consequently, the public has questioned the value of the WPs' audit opinion and the WPs' independence status. The various types of auditor-client relationships that may impair auditors' independence were also discussed as they are presented in the German accounting literature. Several German authors blamed part, if not all, of the independence problem on the lack of an SEC type governmental agency (Aktienamt), on the incompleteness of the Stockcorporation Law of 1965, and/or on the purported inability or unwillingness of the Wirtschaftsprfiferkammer (WPK) to provide more specific guidelines to its members. However, attention was called to the fact that parts of the revision of the WPK's Directives issued in December 1977, explicitly prohibit for the first time certain financial interests by a WP in his audit clients. The Directives also specifically note that maintaining client records and auditing them are incompatible functions. Chapter Three develops more fully the concept of "Total 216 Independence" which consists of two separate components-—independence in fact and independence in appearance. It was reasoned that independence in fact is a concept of individual perception of each auditor and, given certain assumptions of ethical behavior, can be assured by a general rule such as the first sentence of paragraph 43 of the WPs' professional law (WPO) for German auditors, or the first sentence of Rule 101 of the Rules of Conduct for American auditors. Independence in appearance, however, is a collective perception concept which cannot usually be ensured by a general rule. It is argued that the most efficient way of assuring auditors' independence in appearance is the existence of a set of specific rules which prohibit those auditor-client relationships which may be considered by a legitimate third party to impair auditors' independence. Extensive specific rules regarding auditor-client relationships that may impair the appearance of auditors' independence do not presently exist in Germany. Even though there are a few rules such as the casuistry of paragraph 164 of the Stockcorporation Law of 1965 and some new rules as proclaimed in the December 1977 revision of the WPK's Directives, the auditor is left with no specific guidance for a vast number of auditor-client relationships. In Chapter Four, the Research design and methodology were discussed, and the results of the survey were presented and analyzed in Chapter Five. Twenty-seven separate auditor-client relationships were investigated comprising situations in the following categories: 217 a) Financial interest (direct and indirect) b) Bookkeeping and EDP services c) Family relationships d) Occupations with conflicting interest e) Business and other similar relationships Each category was discussed briefly with reference to applicable United States (both AICPA and SEC rulings) and German regulations. Ten of the 27 situations investigated were taken from a similar survey conducted in the United States by Lavin in 1973. This allowed for some comparisons of the perceptions of auditors' independence by WPs and by CPAs. A total of 380 WPs were randomly selected from all licensed WPs and an additional sample of 40 WPs was randomly selected from those WPs who were affiliated with a "Big Eight" accounting firm. Bank officers who were identified as users of audited financial statements are directors of investment departments (LWPs) and directors of loan departments (LKRs). Non-random samples of LKRs and LWPs were selected from the larger banking institutions located in the 12 largest German cities. The bank officers were employed in 114 different banks and 44 branches of four of the largest banks in Germany located in these cities. Thus the sample consisted of 158 LKRs and 158 LWPs. The response rate of usable responses was: WPs, general sample -- 28.4 percent, additional "Big Eight" sample -- 20 percent; LKRs, main office banks -- 44.5 percent, branch banks -- 13.6 percent; LWPs, main office banks -- 28.2 percent, branch banks -- 0 percent. 218 The medium of a mailed questionnaire (in German) was employed to obtain the sample subjects' perceptions concerning auditors' independence in appearance for the 27 auditor-client relationships investigated. The sample subjects were asked to give a dichotomous response -- "Independent"/"Not independent" -- for each of the situations presented. The financial statement user groups, LKRs and LWPs, were asked in addition to indicate on a five-point scale how each situation presented would affect their financial decision. The results as analyzed in Chapter Five show that for most situations the three experimental groups arrived at the same consensus response. Consensus was defined as being a statistically significant majority of opinion. Only on three auditor-client relationships did WPs disagree with both user groups, one situation in each of the following categories: financial interest (Situation 6B), occupation with conflicting interest (Situation l3), and business and other similar relationships (Situation 17C). On four auditor- client relationships the two user groups arrived at different majority opinions, which implies that WPs agreed with one user group only. These four situations involved financial interest (Situations 1 and 58), bookkeeping services (Situation 7), and business and other similar relationships (Situation 16). In three of these four situations the majority of WPs sided with LWPs, namely Situation 1, 58, and 7, and only agreed with LKRs' majority responses for the remaining one situation. The comparison with Lavin's research results and those obtained in this study showed that the WP5 majority responses 219 tended to agree with those of CPAs. In only two out of ten sit- uations did WPs' perceptions differ from those of CPAs. These two auditor-client relationships dealt with financial interest (Situation 4) and with a conflicting occupation (Situation 12). In these two situations, WPs considered the auditing firm to be independent whereas a majority of CPAs perceived the auditing firm to be not independent. Another comparison of WP responses with applicable AICPA and SEC rules revealed that a majority of WPs did not agree with either institutions' rulings on a number of situations. WPs disagreed in 7 out of 11 situations where both the AICPA and the SEC rules are identical. However, for situations where the AICPA and the SEC rules are of divided opinion, WPs tended to agree more often with the AICPA rules than with those of the SEC. WPs agreed with the AICPA on 4 occasions but only for one situation did the WPs majority opinion coincide with SEC rulings. The hypothesis tests which were used to determine whether the perception of auditors' independence have an effect on the financial decisions of users of financial statements indicated that the lending decisions of LKRs were affected in 26 out of 27 situations. The LWPs investment decisions were affected in 19 out of 27 situations by their perception of auditors' independence. Investment decisions of LWPs were unaffected by their perceptions of auditors' independence for 7 auditor-client relationships, and could not be determined for one situation where all LWPs respond- ing considered the auditors to be independent. Four of these 7 situations dealt with relationships in which auditors had a 220 financial interest in their audit client, and one situation each dealt with family relationships, business relationships, and financial interests. LWPs seem to be unaffected in their financial decisions by their perceptions of independence for more situations than LKRs. However, a test of mean responses on the effect of the financial decisions of LKRs and LWPs showed that for none of the situations tested were there statistically significant differences between the mean responses of the two groups at an alpha level of 0.05. Conclusions The interpretations of the results of this study are presented in two parts: (a) those implications which pertain to the German environment only and (b) implications of interest to the U.S. and international environment. Implications Pertaining to the German Environment It was theorized in this study that the recent controversy in Germany concerning the WPs' independence status may have partially been due to a lack of specific rules concerning auditors' independence in appearance. As was reasoned in Chapter Three, specific rules dealing with auditors' independence in appearance are needed to assure "Total Independence". Without these specific rules each WP or auditing firm (WPG) must guess how a legitimate third party will view the auditors' independence status in a certain situation. The results of the survey show that for most of the auditor- client relationships investigated, WPs tended to agree with the 221 two user groups sampled. However, the hypothesis tests of whether there is a consensus within the three experimental groups indicated that for a significant number of situations the null hypothesis of no consensus could not be rejected at an alpha level :_0.05. The WP responses showed no consensus in 9 out of 27 situations. For LWPs, there was no consensus within the group for 11 situations, 9 of which coincide with the same 9 situations where WPs could also not reach a consensus. LKRs were able to arrive at a consensus more often than either WPs or LWPs. They could not reach a consensus in only 7 situations, 5 of which were among those where both WPs and LWPs also could not reach a consensus. The 9 situations on which WPs were unable to reach a consensus consisted of 5 auditor-client relationships involving financial interest, one situation each involving bookkeeping services, legal counseling, Supervisory Board membership and audit client fees representing 25 percent of the total of a WPG's revenue. It may be of interest to note that currently none of these 9 situations are specifically disallowed. The Wirtschaftsprfiferkammer in its interpretations of current laws and regulations pertaining to auditors' independence as they apply to the auditor-client relationships investigated in this study considered the auditors to be independent in 7 out of those 9 situations, not independent in one situation, and for one situation the WPK concluded that the situation must be judged in light of all factors and separately in each individual case. This survey also revealed significant differences of per- ceptions between WPs and the WPK. On five situations where a 222 consensus was reached by WPs, the WPK reached the opposite judgment. Of these five situations, three auditor-client relationships in- volved financial interest (Situations 5A, 6C, and 6D), and two situations dealt with bookkeeping and EDP services (Situations 8 and 9). For two of those five situations, namely Situation 6C and 6D, the WPK considered the auditors to be independent whereas the consensus of WPs considered them not to be independent. For the remaining three situations the consensus response from WPs considered the auditors to be independent whereas the WPK con- sidered the auditors to lack independence in appearance. The fact alone that WPs were unable to reach a consensus on 9 out of 27 auditor-client relationships investigated as well as the disagreement of WP consensus responses with the interpre- tations by their professional organization (WPK) on an additional 5 situations seems to suggest that more specific guidelines are needed to better ensure the independence in appearance of German auditors. Guidelines appear also to be needed for those situations where no consensus was reached within any of the three experimental groups and for auditor-client relationships where WPs disagreed with one or both of the user groups. As one example, the area of legal counseling of audit clients by WPs also qualified to practice law seems to be in need of specific rules since no consensus was reached within each of the three experimental groups for this auditor—client relationship (Situation l3). 223 Implications Pertaining to the U.S. and International Environment The existence and growth of multinational corporations frequently causes auditors of the parent corporation to rely on the audit work performed by foreign auditors. Since German auditors of U.S. subsidiaries essentially must comply with relevant U.S. auditing standards, including the requirement of independence, the findings from this study allow certain interpretations and conclusions. The comparison of WP responses to the official rulings by the AICPA and the SEC shows that for a significant number of situations WPs took a different (usually less stringent) view than did either the AICPA or the SEC. In situations where the AICPA and the SEC were of divided opinion, WPs generally sided with the position taken by the AICPA, the less stringent position. The perceptions of WPs cannot necessarily be considered the individual WP's interpretation of current German Laws and regulations. However, for those situations not covered by specific rules these perceptions may indeed indicate the action a WP may take when confronted with actual situations similar to the ones presented in this survey. Thus U.S. investors planning to invest in German securities should be aware that the financial statements of German corpor- ations (many are translated into English) may be audited by a German accounting firm that is not considered to be independent by U.S. regulations. This study presented evidence that percep- tions of auditors independence by financial statement users may have an effect on their financial decisions. Consequently, 224 disclosure of the independence status in the financial statements used by U.S. investors in making investment decisions would provide significant information. However, at this time there seems to be no vehicle by which this could be accomplished, since the SEC does not have the power to require such disclosure by foreign corporations in their English language financial statements.1 This study is of interest to U.S. auditors of multinational corporations since the results seem to indicate that there may be a greater likelihood of German auditors violating U.S. inde- pendence rules if the German auditors disagree with those rules. Naturally, it can be argued that U.S. auditors of U.S. multi- nationals instruct their foreign auditors to comply with U.S. auditing and accounting rules and probably also indicate to them what they are. Moreover, it may be true that most of the audits of U.S. multinationals are performed by the "Big Eight" accounting firms which do have offices in most Western countries and thus it is likely that the foreign subsidiaries are audited by the "Big Eight" accounting firm's own foreign offices. However, it should be noted that these "Big Eight" offices in foreign countries are largely, if not exclusively, staffed by nationals. In some cases, a German auditing firm is affiliated with a "Big Eight" firm and thus WPs belonging to that German auditing firm may belong at the same time to the "Big Eight" auditing firm. The perception of independence of these WPs may not differ significantly from those WPs not involved with audits of U.S. subsidiaries as some evidence presented in this study suggest.2 Thus, instructing foreign auditors about the specific U.S. independence rules is of vital 225 importance. From an international point of view it seems advisable to develop common rules for all countries. In light of the recent trend in the financial investment field to extend diversification of stock portfolios to include stocks of foreign corporations to lower the overall risk,3 uniform international auditing standards would provide for better financial information to the international investor. The International Accounting Standard's Committee (IASC) is working toward this goal. However, since auditing needs and the auditing professions have developed somewhat inde— pendently within most countries and thus differ, it appears that international uniformity in the accountingprofession will be a slow and strenuous process unless international standards are brought down to the lowest common denominator. The recent criticism of the accounting profession in Germany as well as in the United States would suggest that lowering auditing standards on an inter- national level would be counterproductive. Limitations The conclusions of this study are limited to some extent due to a number of constraints concerning the research methodology and design. Several limitations are inherent in the use of a mail survey. There is always a possibility that sample subjects misunder- stand the purpose of the research or misunderstand the questions asked. However, detailed instructions were sent to each subject and the questions were kept at an easily understandable level 226 which suggest that this confounding variable may not have signif- icantly altered the results. The conclusions concerning the comparison with Lavin's findings and the comparison of WP responses to applicable U.S. rules are limited to the extent that the German translation conveys the true spirit of the word. Since the translation process was carefully reviewed by a number of people competent in both languages and in accounting matters, it appears that distortions concerning the translation may have been rather small. However, it should be noted that Lavin conducted his study in 1973. Any conclusions derived from a comparison of WPs' perceptions and CPAs' perceptions of auditors' independence are limited since CPAs' perceptions may have changed over the last four years. Due to the sizable percentage of nonrespondents, the results of this survey can only be generalized to the WP profession at large if it is assumed that nonrespondents do not significantly differ from those who responded. Strictly speaking, the results obtained from WP respondents cannot be generalized to the profession at large. However, a test performed to deteCt a possible nonresponse bias seems to indicate a lack of a material nonresponse bias. LKRs and LWPs were selected on a non-random basis. This precludes generalization of the results to a larger population. Logical but not statistical inferences, however, can still be drawn. This research was also limited by the selection of a limited number of auditor-client relationships, the type of financial statement users chosen, and the dichotomous type of response 227 employed for the independence decision. Thus it should be noted that the conclusions reached apply only to those specific situations selected. Although LKRs and LWPs represent two important user groups of audited financial statements, their responses cannot be considered representative of all financial statement users. The sample subjects were only given the choice of a dichotomous response for the independence decisions to conform with German and U.S. rules on auditors' independence. However, it is possible that some respondents consider the independence question not to be a black and white situation even though they were forced to make such a choice. The above limitations should be kept in mind; however, they do not significantly diminish the importance of the findings of this study. Suggestions for Future Research Some of the limitations mentioned could be overcome in future research efforts. The range of auditor-client relationships could be expanded to include the various types of management advisory services (MAS) currently provided by German and U.S. auditors to their audit clients. There is little doubt that certain types of MAS may impair the auditors' appearance of independence. A recent study by Richter revealed that a sizable portion of WPs and business journalists sampled perceived providing MAS to audit clients as incompatible with the audit function.4 Similar criticism of these activities has been raised in 228 the United States.5 However, it appears that certain MAS activities may affect the auditors' independence status negatively whereas other MAS activities may not affect them. An outright abolishment of these services, which has been suggested by some authors may not be warranted, nor necessary.6 Research needs to be done in this area to establish which MAS activities would impair Wirt- schaftsprfifer's independence and consequently should be prohibited. Another way to overcome some of the limitations of this study would be to include different user groups of audited financial statements. Even though LKRs and LWPs appear to be important user groups, perhaps an extension of this study which includes a random sample of members of the two German corporate boards, stockholders, financial analysts employed by German insurance companies, and the user group sampled by Richter, business journalists, would provide additional evidence as to the financial statement users' perceptions of auditors' independence. There is no empirical evidence that indicates the extent to which LKRs and LWPs can be considered an adequate surrogate of all users of audited financial statements. A third way to extend this research is to expand the survey to include auditors and financial statement user groups in other Common Market countries. The Union Europeéne des Experts Comptables Economiques et Financiers recently issued a statement on auditors' independence Which notes the potential of auditors' independence impairment in certain types of situations most of which are in— cluded in this survey. Such an extension of this research would help to provide empirical evidence in the fOrmulation of more specific 229 rules of conduct concerning auditors' independence in appearance. Such specific rules are a prerequisite to solving the auditors' independence problem. 230 CHAPTER SIX--FOOTNOTES Unless, of course, the German corporations register with the SEC if they plan to offer securities in the United States. See Rappaport, L. H., SEC AccountinggPractice and Procedure - Third Edition (New York: The Ronald Press Company, 1972), Chapter 31. To test for significant differences of perceptions concerning auditors' independence between WPs belonging to "Big Eight" accounting firms and WPs who do not belong to "Big Eight" accounting firms, the Chi Square Test was applied. However, the test results did not indicate any significant differences between the two groups. See, "Has Morgan Started Something?" Forbes (April 3, 1978), pp. 114-116. See Richter, M., "Die Unabhfingigkeit des Wirtschaftsprfifers," Universitfit des Saarlandes (July, 1976). See, The Commission of Auditors' Responsibilities: Report, Conclusions, and Recommendations, M. F. Cohen, Chairman (New York, 1978), pp. 94-104. As Biener points out, efforts of the Common Market Commission to prohibit management consulting (Beratung) were thwarted in the beginning stages due to opposition of the accounting profession and industry. One argument was economic, noting that there is not enough audit work to keep the WP profession busy. However, Biener comments that with the proposed require- ments of mandatory audits of limited liability companies (GmbHs), a possible 50,000 GmbHs may have to be audited which should provide sufficient audit work for WPs to lessen their management consulting activity. See Busse von Colbe, W., and Lutter, M. (eds), WirtschaftsprfifungHeute: Entwicklung odernReform? Ein Bochumer Symposium (Wiesbaden: Verlag Dr. Th. Gabler, 1977), pp. 127-128. APPENDICES APPENDIX A COVER LETTER, FOLLOW-UP LETTER AND QUESTIONNAIRE MAILED TO M RTSCHAFTSPRUFER 231 232 MICHIGAN STATE UNIVERSITY GMDUATI SCHOOL or sum mmmnou m wusmc . sucnma . «m soul-MINT or meow-mac a mm Anna-{Emma November 25 , 1977 Sehr geehrter Herr Wirtschaftsprufer! Die unabhangige und objektive Ausfibung des Wirtschaftsprfiferberufes ist von grosser Bedeutung fur die Funktion der deutschen und inter- nationalen Wirtschaftsgemeinschaft im allgemeinen und fur den Berufs- stand des Wirtschaftsprfifers im besonderen. Die UEC-Kommission fur Berufsgrundsatze verdffentlichte kfirzlich den Entwurf einer Empfehlung (Nr. 10). die sich unter anderem mit einigen Situationen befasst. we die Unabhéngigkeit und Unbefangenheit der Wirtschaftsprufer/~3esellschaft in Frage gestellt werden kdnnte. Mr. Hans Jay Dykxhoorn, Certified Public Accountant and zur Zeit Doktorand an der Graduate School of Business at Michigan State University. ffihrt im Rahmen seiner Doktorarbeit eine Studie aus. die sich mit der Uhabhangigkeit und Unbefangenheit der Wirtschafts- prfifer befasst. Mr. Dykxhoorn hofft. dass seine empirische Resultate zu einem besseren Verstandnis des Begriffes der Unabhfingig- keit auf dem Gebiet der Wirtschaftsprfifung in Theorie und Praxis ffihren warden. Der beigeffigte. anonyme Fragebogen wurde in der Absicht aufgesetzt, die Ansichten von Wirtschaftsprufern hinsichtlich des Unabhangig- keitsproblems zu ermitteln. Ich darf Ihnen versichern. dass alle Daten und Angaben streng vertraulich behandelt werden und die Resultate nur in Tabellenform erscheinen warden. Bitte benutzen Sie den beigefugten, adressierten und frankierten Briefumschlag ffir die Rficksendung des ausgeffillten Fragebogens. Die Nummer auf der Rfickseite dieses Briefumschlages dient der Eingangskontrolle. Falls Sie on der Zusendung des Ergeb- nisses dieses Forschungsvorhabens interessiert sind. bitten wir Sie um Angabe Ihrer Adresse. Wir hoffen. das Sie ungeféhr 15-20 Min. zur Verffigung haben. da wir Ihrer Mitarbeit an dieser Studie erhebliche Bedeutung beimessen und Ihre Angaben mit grossem Interesse entgegensehen. mr. Dykxhoorn hofft. wahrend seines kurzfristigen Anfenthalts in Deutschland (vom 25. November bis 31. Dezember) die Rficksendungen der Fragebdgen an die angegebene Adresse zu verfolgen. Ich bitte Sie deshalb, den angegebenen Zeitraum zu berficksichtigen. Mit freundlichen Grfissen Anlage file/5224.54, r. Harold M. Sollenberger, .P.A. Professor and Chairman, Department of Accounting and Financial Administration 233 MICHIGAN STATE UNIVERSITY — f GRADUATE SCHOOL Of BUSINESS ADMINISTRATION hASl LANSING ' MICHIGAN - all“ DEPARTMENT OF ACCOUNTING 5 FINANCIAL ADMINLS'IRAIION 12. Dezember 1977 main Schreibem vom 25. November 1977 Sehr geehrter Herr Wirtschaftsprflfer, ich erlaubte mir, Ihnen vor zwei Wochen im Rahmen . einer Doktorarbeit, die die Beziehung zwischen Wirtschafts- prflfer und Klientel zum Thema hat, einen Fragebogen mit der Bitte um RUcksendung zuzusenden. Leider konnte Ihr Beitrag bis heute noch nicht zu den bereits eingetroffenen und ausgeffillten Fragebbgen gezahlt werden. Ihre Mitarbeit an diesem Forschungsprojekt ist von groBer Wichtigkeit, da die Qualitat des Ergebnisses ohne Ihren Beitrag im Wert erheblich gemindert sein wfirde. Ich nehme an, daB der Pragebogen nicht in Ihre Hande ge- langt ist. Aus diesem Grunde fibersende ich Ihnen in der Anlage noch einmal ein Exemplar dieses Fragebogens mit der freundlichen Bitte. diesen beantwortet zurflckzusenden. Bin adressierter Briefumschlag ist beigeffigt. Schon heute mOchte ich Ihnen fUr Ihre wertvolle Mitarbeit herzlich danken. Mit freundlichen GrfiBen I Hans Jay Dykxhoorn, C.P.A. Michigan State University 2.2t. KOrner Strafle 10 4250 Bottrop Deutschland Anlage 234 Doctoral Dissertation Research Michigan State University Return Questionnaire to: c/o Hans Jay Dykxhoorn, C.P.A. 2.2. Koernerstrasse 10 4250 Bottrop West Germany g. d b. mcmm sun umvmsn W Eine Studie der Wirtschafts rfifer — esellschaft-Klientel < Beziehungen Jede der folgenden Situationen beschreibt ein bestimmtes Verhaltnis zwischen einer Wirtschaftsprufungsgesellschaft und einem ihrer Jahresabschlussklienten. Bitte fiberprufen Sie jede einzelne Situation. um zu entseheiden. ob Sie glauben, dass eine Wirtschafts- prufungsgesellschaft in jedem Fall unabhan i und unbefan en oder nicht unabhangig und nicht unbefangen ist. besonders im Hinblick auf die Jahresabschlussprufung. Bitte beachten Sie. dass die Unabhangigkeit und Unbefangenheit eines Wirtschaftsprufers sich nicht nur auf die Fahigkeit bezieht. objektive und unvoreingenommene Entscheidungen in Verbindung mit der Abschlussprufung zu treffen. sondern auch darauf. wie es die Wirtschaftspruferkammer in ihren Richtlinien vorschreibt. das kein sachlich vernunftiger Grund besteht, aus dem die Besorgnis der Befangenheit abgeleitet werden kann. Bitte stellen Sie sich vor. dass in jeder der folgenden Situationen die genannte Wirtschaftsprufungsgesellschaft der Wirtschafts- prufungsfirma gleicht. mit der Sie im Augenblick zusammenarbeiten (entweder als Angestellter oder Gesellschafter) und dass der erwahnte Klient einer Ihrer Klientenfirmen von mittlerer Grdsse gleicht. Bitte beurteilen Sie jede der folgenden Situationen. welche auf den nachsten drei seiten dieses Fragebogens beschrieben sind, fur sich getrennt. Sample: German Certified Public Accountants - (Wirtschaftsprufer) 2235 Unabhingigkcitscntschcidung (gitte kreisen Sic cine Nummer ein fur Ihrc Beurteilinx der Situation) Unabhhngig Nicht unabhingig und und nicht unbefangen unbcfangcn Das Bfiro ciner Wirtschaftsprfifungsgescllschaft befand sich in einem Gebaudc, das cincr Klientcnfirma gchfirte. Die Wirtschaftsprufungsgesellschaft vcrfugte uber ungefahr 25 Prozent dcs vorhandenen Buroraumes in Gebaude und dcr Klient benutzte den restlichcn Bfiroraum .............................................. l 2 Eine Wirtschaftsprfifungsgcsellschaft ffihrte ffir eincn Klicnten nicht nur die Prfifung dcs Jahresabschlusses durch, sondern ubte auch weiterc Dicnstleistungen aus, cinschlicsslich allgemeiner Fuhrung dcr Journalc und Hauptbfichcr, Abschlussbuchungcn und Anfertigung dcr Jahrcsbilanz ............................... . .......... l 2 Zwecks Handhabung vertraulicher Informationen beauf— tragte cine Klicntcnfirma cine Wirtschaftsprufungs- gcscllschaft nicht nur fur dic Jahresabschlussprufung, sondern auch fur die folgcndcn Dienstc: (a) nonatlichc Gchaltsbuchffihrung der gcschaftsffihrenden Angestcllten (b) Ffihrung bestilntcr Kontcn in einem privatcn Buchffihrungsjournal ..................... l 2 Ein Angestelltcr in eincr Wirtschaftsprfifungsgesel1- schaft mit funf Jahrcn Prufungscrfahrung vervaltete personlich ein Gebaude, das einem ihrcr Jahresabschluss- prufungsklientcn gchorte .......................... .... l 2 Die Angestellten eines Klientcn fertigtcn von verschiedenen Journalen (Bfichern) Computerlochstreifen an, welchc mit einem Optical Scanner gelesen werdcn konntcn, and schicktcn diese Lochstreifen zum Bfiro ihrcr Abschlussprfifer. Die Wirtschafts- prfifungsgcsellschaft sandte die Lochstrcifen in unverinderter Form weiter zu cine! Computer Service. Die Wirtschaftsprufungsgesellschaft erhielt die gcdruckten Ergebnisse dcs Jahresabschlusses und Auszfigc der Hauptbfichcr von den Computer Service zurfick und schicktc sic zu ihrem Klicnten. Die Wirtschaftsprufer- gesellschaft verrichtete dicse Arbeit zusitzlich zu der Jahresabschlussprfifung.... .......... l 2 Geliss eines Umschuldungsplanes wurdcn die Schulden der Klientenfirma durch Schuldscheine untcrlcgt, die nach ffinf Jahrcn fillig werdcn sollten. Die Wirtschaftsprfifungsgcsellschaft erhiclt ebenfalls Schuldschcine ffir ihre Jahresabschlussprfifungsarbciten .............. l 2 -1- 7. 10. ll. 12. 13. 2L36 Unabhingig Nicht unabhfingig und und nicht unbcfangen unbefangen A war dcr Controller der Firms 2. Er war ein Firmen- ' angestcllter und nicht von Aktionircn dcr Firms zu seinem Posten gewihlt. A's Brudcr, 8, war ein Wirt- schaftsprufer der Jahresabschlussprfifungsgcsellschaft dcr Firms 2, aber chrsénlich war in keincr Neisc mit der Jahresabschlussprfifmg der FirmaZ verbunden ............ l . 2 Sin Wirtschaftsprufer einer Wirtschaftsprfifungsgesell- schaft hatte cincn Schwagcr in lcitendcr Position in der Verkaufsabteilung einer neucn Klicntenfirma. Der Schwager war nicht an finanziellen Entscheidungen seiner Firma beteiligt. Der Wirtschaftsprufer selbst hatte personlich nichts mit der Jahresabschlussprfifung zu tun ..................................................... l 2 Eine Wirtschaftsprfifungsgcsellschaft vermietcte "block tine" ihres Computers an cincn Klienten, als dcr Computer des Klientcn fibcrfordert war. Die Wirtschaftsprfifungsge- sellschaft war zugleich die Abschlussprfifungsfirma dcs Klienten ................................................... l 2 Der Klient einer Wirtschaftsprfifungsgesellschaft verkauftc Konzcssioncn (franchises). chi Wirtschaftsprufer der Nirtschaftsprfifungsgescllschaft.lcgtcn ungeffihr ffinf Prozent ihrcs Vernogens an ffinfzig Prozcnt der Aktien dcr Firma 5 an. Die Firms E'hattc cine Konzcssion von den Klienten eruorben. Hit Ausnahmc der Auszahlung eines bestiuntcn Prozcntsatzcs vom Unsatz an den Klienten arbcitetc die Firms §_sclbststindig und unabhingig ......... l 2 Ein Wirtschaftsprufer eincr Wirtschaftsprfifungsgesel1- schaft besass ein Prozent dcr Aktien dcr Firms 5. deren Tochtergcsellschaft A ein kfinftiger Klient der Nirtschaftsprfifungsgesellschaft werden 5011. Der Wirtschaftsprufer, den diese Aktien gehortcn, ist in keiner Heise an den Abschlussprfifungserbeiten betciligt .................................................. 1 2 Ein Wirtschaftsprufer einer Nirtschaftsprfifungsgese11- schaft bcsass cin Prozcnt dcr Aktien der Firms 2, deren Tochtcrgescllschaft §_ein kfinftiger Klient der Wirt- schaftsprfifungsgescllschaft werdcn soll.Der Wirtschafts- prufer, den diese Aktien geharten, wird als dcr Prfi- fungsleiter der Abschlussprfifung dcr Tochtergcsellschaft 5_fungieren .............. . ..... . ........................... 1 2 Sin Wirtschaftsprufer einer Wirtschaftsprfifungsgesell- schaft war ebenfalls als Rechtsanwalt fur cincn Klicnten titig, genaucr gcsagt, er vertrat dcn Klicntcn in allen Rechtsangelegenhciten. Ffir diesen Dicnst erhielt er Gcbfihren von dem Klicnten. Ebcnfalls erhiclt er von dcr Nirtschaftsprfifungsgesellschaft Gebfihrcn fir die Jehresabschlussprfifung, da die Iirtschaftsprfifungsgesellschaft der Abschlussprfifer der Klientenfirma war ...................... l 2 -2- 14. 15. 16. 17. 2257 Unabhangig Nicht unabhingig und und nicht unbefangen unbcfangen Ein Wirtschaftsprufer einer Wirtschaftsprfifungsgesellschaft besass Aktien cincr kfinftigcn Klientcnfirma. Seine Wirt- schaftsprfifungsgesellschaft soll die Jahresabschlussprfi- fun: durchffihren. Bitte beurteilen Sie die folgenden Situationen fur sich getrennt. Situation A. Der Wirtschaftsprufer besass nur sehr wenige Akticn dcr Klientenfirma (wcniger als ein Prozcnt seines Vermogens) ................................. l 2 Situation 8. Der Wirtschaftsprufer besass drci Prozcnt dcr A ticn der Klicntenfirma (ungefahr zehn Prozcnt seines Vermogens) ..................................... 1 2 Situation C. Der Wirtschaftsprufer besass zehn Prozcnt der Akticn der Klicntcnfirma (ungefihr zehn Prozcnt seines Vermogens)....................... ...... ........ 1 2 Eine Bank erwarb einen bedeutenden Teil der Akticn dcr Firms 8, genfigend um cincn erhcblichen Einfluss anf die GeschaYtsffihrung auszufiben. Die Bank besass ausserdem Akticn einer Wirtschaftsprfifungsgesellschaft, welche damit beauftragt war, die Jahresabschlussprufung dcr Firma S durchzufuhren. Bitte beurteilen Sie die folgcndcn Situationen fur sich gctrennt. Situation A. Die Bank besass ungeffihr 10 Prozcnt dcr Akticn dcr Wirtschaftsprfifungsgesellschaft....... ..... 1 2 Situation 8. Die Bank besass zwischen 11 und 24 Prozcnt der Aktien dcr Wirtschaftsprfifungsgescllschaft ........ l 2 Situation C. Die Bank bcsass zwischen 25 und 49 Prozcnt der Aktien der Wirtschaftsprfifungsgesellschaft ........ l 2 Situation D. Die Bank besass gcnau SO Prozcnt der Aktien der Wirtschaftsprfifungsgesellschaft...... ............. 1 2 Situation E. Die Bank besass mehr als SO Prozcnt dcr Aktien der Wirtschaftsprfifungsgescllschaft... ......... l 2 Sin Wirtschaftsprufer einer Wirtschaftsprfifungsgcsell- schaft war ein Mitglied des Aufsichtsrats der Firna L. Die Firma L war cine der grosstcn Lieferantcn der Firua M. Die Wirtschaftsprufungsgescllschaft war beauftragt, die Jahresabschlussprufung der Firma M durchzufuhrcn.u .......... .... ...... . ....................... 1 2 Ein gcwisser Tcil der Einnahncn einer Wirtschaftspru- fungsgescllschaft bestand aus Abschlussprfifungsgcbfihrcn einer einzelnen Klicntcnfirma. Bitte beurteilen Sie die folgcnden Situationen ffir sich getrcnnt. Die Gebfihren von dcr cinzelnen Klientcnfirma betrugen von den Gesamteinnahmen den folgenden Prozcntsatz: Situation A: ungcffihr S Prozcnt der Gesamteinnahmcn...... ........................ l 2 Situation 8: ungefa'hr 10 Prozcnt dcr Gesamteinnahmcn ....... . ...................... 1 2 Situation C: ungeffihr 25 Prozcnt der Gcsamteinnahmen........... ....... ...... ...... l 2 Situation D: ungcfihr SO Prozcnt der Gesanteinnahmen......... .................... . 1 2 Situation E: ungefahr 7S Prozcnt der Gesanteinnahmen ........................... ... l 2 -3- 1138 Ffihrt Ihre Nirtschaftsprfifungsgcsellschaft auch Jahresabschlussprfifungcn von amerikanischen (U.S.) Tochtcrgesellschaftcn durch? Ja Nein Wie vicle Jahre Prfifungserfahrung haben Sic? (Bittc runden Sic ab) Jahre Ho licgt das Schwcrgcwicht Ihrcr bcruflichen Tatigkeit und Erfahrung? (Bittc krcisen Sic cine Nummer oder mehr als cinc Nummer cin, falls zutrcffcnd) Abschlussprufungsarbciten ..................................... 1 Steuerberatung ................................................ 2 Management Consulting.... ..................................... 3 Sonstigcs (Bittc crlautcrn Sic) 4 Raum fur zusKtzlichc Bemcrkungcn Falls Sic an der Zusendung dcs Ergcbnisses dicscs Forschungs- vorhabcns intercssicrt sind, bittc ich Sic um Angabc Ihrer Adressc. Ich dankc Ihnen ffir Ihre Mfihc umd Bercitschaft mich bei diescm Forschungsprojekt zu unterstfitzen. Hana Jay Dykxhoorn. C.P.A. 239 English Translation A STUDY OF AUDITOR—CLIENT RELATIONSHIPS Each of the following situations involves a different relationship between an accounting firm and its client. Please evaluate each situation to determine whether zgu_think an accounting firm would be considered independent (unbiased) or ngt_independent (biased) with respect to a year-end audit of the client involved. Please note that the independence of a Wirtschaftsprufer not only deals with his ability to make objective and unbiased audit decisions but also, as the Wirtschaftsprfiferkammer in its Directives mandates, that there are no circumstances that may suggest that the auditor's appearance of independence may be impaired. Assume that the accounting firm in each of the following situations is similar to the firm with which you are now affiliated. Also, assume that the client is similar to one of your medium-size clients. Please evaluate each of the following situations described in this questionnaire separately. Sample: German Certified Public Accountants (Wirtschaftsprfifer) 1. 240 Independence Decision (Please circle one number) Independent Not independent {not biased) (biased) An accounting firm had its office in a building which was owned by a client. The accounting firm occupied approximately ZS percent of the available office space in the building, and the client occupied the remainder ...... . ............ l 2 In addition to the audit, an accounting firm provided services for the client which included maintaining the journals and ledgers, making adjusting entries and preparing financial statements................................... ....... l 2 In order to keep certain information confidential, the client had the accounting firm perform the following services in addition to the audit: (a) prepare the executive payroll (b) maintain selected general ledger accounts in a private ledger........... ...... ... ........ l 2 A partner in an accounting firm managed a building owned by an audit client ............................ 1 2 From the books of original entry, client personnel prepared printed tapes that could be read on an optical scanner and sent the tapes to the accountant's office. The accountants forwarded the tapes to a service bureau. The accountants received the print-outs of the financial statements and general ledgers and sent them to the client. The accountants did not edit the input data prior to transmission to the service bureau. The accountants provided this service in addition to the audit. ..... . ............. l 2 Pursuant to a plan of recapitalization, the existing debt of the company was exchanged for five-year promissory notes. The accounting firm received the same kind of promissory notes in payment of its audit fee................... 1 2 7. 10. ll. 12. 13. 241 Independence Decision (Please circle one number) Independent Not independent (not biased) _(biased) A was the controller of Company Z. He was not an elected officer nor did he have any stock holdings in Company Z. A's brother, 8, was a partner in the public accounting firm that audits Company Z's books. However, 8 was not the partner in charge of the audit .......... . ........... l 2 A partner in a public accounting firm had a brother-in-law who was sales vice president for a recently acquired client. The brother- in-law was not directly involved in the financial affairs of the company and the partner was not connected with the audit in any way ........................ ... .............. ..... l 2 An accounting firm rented block time on its computer to a client when the client's computer became overburdened ................... . ................. l 2 A client of an accounting firm was engaged in the business of selling franchises. THO partners of this accounting firm invested approximately five percent of their personal fortunes to buy one half of the stock of a corporation which held a franchise granted by this client. Except for the payment of a percentage of sales to the franchisor client, the franchise operated independently..... ........................... . .......... I ~ 2 A partner in an accounting firm whose proposed client A was a wholly owned subsidiary of corporation 8, owned one percent of the stock of corporation 8. The partner who owns these stocks would not in any way be involved with the year-end audit ..... .......... ............ . ....... ... l 2 A partner in an accounting firm whose proposed client A was a wholly owned subsidiary of corporation 8, owned one percent of the stock of corporation B. The partner who owns these stocks would be in charge of the year-end audit ................. .. ............. . ..... l 2 A partner in an accounting firm (qualified as a lawyer) also acted as general counsel for an audit client. He received fees for such legal services and, through the accounting partner- ship, for accounting services rendered concurrently.... .................. . ..................... 1 2 14. 15. 16. 17. Situation A: Situation C: Situation D: Situation E: 242 Independence Decision (Please circle one number) Independent Not independent (not biased) A partner in an accounting firm owned stocks of a proposed client for which he was engaged to do the year-end audit. Consider each of the following situations separately. Situation A. The partner owned a very small number of shares of the client amounting to less than one percent of his net worth... ....... .......... Situation 8. ......OOOOOOIOOI The partner owned 3 percent of the client's stock amounting to 10 percent of his net worth ............ Situation C. The partner owned 10 percent of the client's stock amounting to 10 percent of his net worth ............ A bank acquired a large number of shares of company S, large enough to enable the bank to significantly influence the management of company S. In addition, the same bank also owned shares of the auditing firm that was engaged to per- form the year-end audit of company 5. Consider each of the following situations separately. Situation A. The bank owned approximately 10 percent of the outstanding stock of the Situation 8. The bank owned outstanding stock of the Situation C. The bank owned outstanding stock of the Situation D. The bank owned between 11 and 24 percen of the between 25 and 49 percent of the auditing firm... exactly 50 percent of the out- standing stock of the auditing firm ...... . ......... . ...... Situation E. outstanding stock of the auditing firm..... ............... The bank owned more than 50 percent of the A partner of an accounting firm was also a member of the Supervisory Board of Corporation L. Corporation L was one of the largest suppliers of Corporation M. The accounting firm was engaged to perform the year-end audit of Corporation M.. ...... ........,.............. ...... .... A certain portion of an accounting firm's revenue consisted of audit fees from one particular client. Consider each of the following situations separately. The fees from this particular client represented approximately: Situation 8: auditing firm .......... .... . .... auditing firm..... ............... 5 percent of total revenue... ................ ..... 10 percent of total revenue ..................... 25 percent of total revenue ..................... 50 percent of total rcvenue..................... 75 percent of total revenue ..................... (biased) l 2 .. l 2 .. 1 2 l 2 .. l 2 .. 1 2 .. I 2 l 2 .. 1 2 .. l 2 .. l 2 243 Does your accounting firm perform annual audits of U.S. Yes No subsidiary companies? To the nearest year, how many years of experience do you have in the auditing profession? years What is your personal area of professional emphasis? (You may circle more than one number if appropriate) Auditing ..................................................... 1 Tax ........ . ................................................. 2 Management Consulting ....................................... . 3 Other (Please specify) 4 Use this space for additional cements If you would like to receive a summary of the research results, give your address below. Thank you very much for your cooperation. Hans Jay Dykxhoorn, C.P.A. APPENDIX B COVER LETTER, FOLLOW-UP LETTER AND QUESTIONNAIRE MAILED TO LEITER DER KREDITABTEILUNG 244 245 MICHIGAN STATE UNIVERSITY emanmovmsmmmmnm mums-muons. com or mums a mum; mums-rum NOVBMDGP 25 o 1977 Schr gcehrtcr Herr Leiter der Kreditabteilung! Die unabhangige und objektive Ausfibung dcs Hirtschaftsprfiferbcrufes ist von grosscr Bedcutung ffir die Funktion dcr deutschen und inter- nationalen Hirtschaftsgemeinschaft. mr. Hans Jay Dykxhoorn. Certified Public Accountant and zur Zeit Doktorand an dcr Graduate School of Business at Michigan State University. ffihrt im Rahmcn seiner Doktorarbcit cine Studie aus, die sich mit der Unabhfingigkeit und Unbefangenheit der Wirtschafts- prufer befasst. Mr. Dykxhoorn hofft. dass seine empirische Resultatc zu einem besscrcn Verstindnis dcs Begriffcs dcr Unabhangigkeit auf dem Gebiet der Wirtschaftsprfifung in Theorie und Praxis fuhren warden. Der beigeffigte. anonymc Fragebogcn wurde in der Absicht aufgcsctzt. nicht nur die Meinungcn von Wirtschaftsprufern. sondern auch die Ansichtcn von beteil1gten Dritten. die mit der Handhabung von Jahresabschlfisscn vertraut sind. zu ermitteln. Ich darf Ihnen versichcrn, dass alle Daten und Angaben streng vertrau- lich behandelt warden und die Resultate nur in Tabellcnform erschei- nen warden. Bittc bcnutzen Sic den beigeffigtcn. adrcssiertcn und frankiertcn Briefumschlag ffir die Rucksendung des ausgcffilltcn Pragebogens. Die Nummcr auf der Rfickseitc dicscs Bricfumschlages dient der Eingangskontrolle. Falls Sic an der Zuscndung dcs Ergeb- nisscs dicscs Porschungsvorhabens intercssiert sind. bitten wir Sic um Angabe Ihrer Adresse. - Hir hoffen. das Sic ungcffihr 15-20 Min. zur Vcrffigung habcn. da wir Ihrer Mitarbcit an dicser Studie erheblichc Bedcutung beimesscn und Ihre Angaben mit grosscm Interessc entgcgensehen. Mr. Dykxhoorn hofft. wihrend seines kurzfristi en Anfenthalts in Deutschland (vom 25. November bis 31. Dezcmbcr die Rficksendungcn der Pragebogcn an die angcgebenc Adressc zupverfolgen. Ich bittc Sic dcshalb. den angegebenen Zeitraum zu berucksichtigen. Mit freundlichen Grfissen Anlgge W/Wfl Dr. Harold M. Sollenberger. C.P.A. Professor and Chairman. Department of Accounting and Financial Administration 246 MICHIGAN STATE UNIVERSITY 'GIADUATE SCHOOL 0! WITNESS ADMINISTRATION EAST LANSING ' "CMIGAN ' «an DEPARTMENT Of ACCOUNTING A flNANCIAI. ADMINISTRATION 12. Dezember 1977 main Schreiben vom 25. November 1977 Sehr geehrter Herr Leiter der Kreditabteilung, ich erlaubte mir, Ihnen vor zwci wochen im Rahmcn einer Doktorarbeit. die die Beziehung zwischen Wirtschafts- prufer und Klicntel zum Thema hat, cincn Pragebogen mit der Bittc um Rucksendung zuzusenden. Leider konnte Ihr Beitrag bis heute noch nicht zu den bereits cingetroffenen und ausgefflllten Pragebbgen gezahlt warden. Ihre Mitarbeit an dicsem Forschungsprojekt ist von groBer Wichtigkeit, da die Qualitat des Ergebnisses ohne Ihren Beitrag im Wert erheblich gemindert sein wurde. Ich nehme an, das der Fragebogen nicht in Ihre Hands ge- langt ist. Aus dicsem Grunde fibersendc ich Ihnen in der Anlage noch einmal ein Exemplar dieses Pragebogens mit der freundlichen Bitte, dicsen beantwortet zurfickzusenden. Bin adressierter Briefumschlag ist beigefugt. Schon heute mochtc ich Ihnen fur Ihre wertvolle Mitarbeit herzlich danken. Hit freundlichen GruBen 'wf'fl/r. ' _'V .. l “I; W Hans Jay Dykxhoorn, C.P.A. Michigan State University z.Zt. Kdrner StraBe 10 4250 Bottrop Dcutschland Anlage 247 Doctoral Dissertation Research Michigan State University c/o Hana Ja ay Dykxhoorn. C. P.A. . Koernerstrasse 10 .1, MICHIGAN sun umvmsm 3232 32:12:35 Eine Studie der Wirtschafts erer - esellsc aft-Klientel Bezichuggen chc dcr folgenden Situationen bcschreibt ein bestimmtes Verhaltnis zw ischen einer Wirtschaftsprufungsgesellschaft und einem ihrcr Jahresabschlusaklienten. Bitte uberprufen Sic jede einzelne Situation. um zu entsc heiden. ob Sic glauben. dass cine Wirtschafts- prufungsgesellschaft in jedem FalI_Una bhh mgig gnd gnbcfaggen oder nic ab 1 umdn cht unbe an en ist, besonders im Hinblick auf d c Jahresabschlussprufung. Bittc markicrcn Sic ebcnfalls. in welchem ass e Ihre Kreditcntscheidung in jcdem cinzelnen Fall beeinflusst ware. Bitte beachten Sic. dass die Unabhangigkeit und Unbefangenheit eines Wirtschaft sprufers sich nicht nur auf die Fahigkeit bezieht. objektive und unvoreingenommenc Entscheidungen in Verbindungm der Abschluss rufung zu trcffen. sondern auch darauf. wic es die Wirtschaftspruferkammcr in ihren Richtlinien vorschreibt. dass kein sachlich vernfinftiger Grund besteht. aus dem die Besorgnis der Befangenheit abgeleitct warden kann. Bitte stellen Sie sich vor. daas in jcdcr der folgenden Situationen. ie gc cnannte Wirtschaftsprufungsgesellschaft cine typis mh Wirtschaftsprufungsfirma dars tcllt, und dass dcr erwfihnte nient. (oder die erwahntc Klientcnfirma) cincn Ihrer eventuellcn Kredit- kunden von mittlercr Grésse representiert. Bittc beurteilen Sic jcdc dcr folgenden Situationen. welche auf den nachsten drei eiten dieses Fragebogens beachrieben sind. fur sich getrennt. Sample: Directors of Loan Departments (Leiter dcr Kreditabteilung) 248 Bitte bcnutzen Sic dies3975chlfissel fur Ihre Agtwortgn. Unabhingigkcitsentschcidugg Kreditentscheidung 1- Ja, ich glaube. dass in diescr Situation Heine Kreditentscheidung ist die Hirtschaftsprfifungsgesellschaft l- stark negativ bceinflusst unathngig und unbefangen ist. 2s leicht negativ beeinflusst 2- Nein. ich glaube nicht. dasg in dieser 3- unbeeinflusst. weder negativ noch positiv Situation die lirtschaftsprufungsge- 4- leicht positiv beeinflusst sellschaft unabhingig und unbefangen ist. s- stark positiv beeinflusst Unabh'a'ngi gkeits- entscheidung (Bittc kreisen Sie cine Nulmer ein) 1. Des Euro einer Wirtschaftsprufungsgescll- schaft befand sich in einem Gebaude. das einer Klientcnfirma gehorte. Die flirt- schaftsprfifungsgescllschaft vcrffigte fiber ungef'a'hr 25 Present des vorhandenen lfiroraumes im Cebiude und der Klient bcnutzte den restlichen Bfiroraum .................. l 2 2. Eine flirtschaftsprufungsgescllschaft fuhrte fur cincn Klienten nicht nur die Prufung des Jahresabschlusses dutch, sondern the such wcitcrc Dienstleistungen aus. einschliesslich allgemeiner Ffihrung der Journalc und Hauptbficher, Abschluss- buchungen und Anfertigung der Jahresbilans. ...... . 1 2 3. Zwecks Handhabung vertraulichcr Informationen beauftragte eine Klientenfirma cine virt- schaftspru'fmgsgescllschaft nicht nur ffir'die Jahresabschlussprfifung. sondern such ffir die folgenden Dicnste: (a) monatliche Gehaltsbuchffihrung dcr geschiftsffihrcndcn Angcstcllten (b) Fiihrmg bestintcr Konten in einem privaten Buchffihrungsjournal.. ............... I 2 4. Sin Angcstellter in einer Wirtschaftsprfifungs- gesellschaft mit fu'nf Jahrcn Prfifungserfahrung verwaltcte personlich ein Gebaude, das einem ihrcr JahresabschlussprufungskIicntcn gehSrte ............ .......... ........ . ............ l 2 5. Die Angestellten eines Kiicnten fertigten von verschicdenen Journalen (BGchern) Computcrlochstreifen an. welche mit einem Qpaical Scanner gelesen wcrdcn konnten. schicktend diesc Lochstreifen tun Euro ihrer Abschlussprufer. Die lirtschafts- prfifungsgcsellschaft sandte die Lochstreifcn in unverinderter Form wciter zu einem Computer Service. Die Wirtschaftsprufungs- gesellschaft erhiclt die gedrucktcn Ergebnisse des Jahresabschlusses und Auszugc der Hauptbuchcr von dem Computer Service zurfick und schickte sic su ihrem Klientcn. Die lirtschaftsprufergesellschaft verrichtete diese Arbeit :usitzlich zu dcr Jahresabschluss- prufung........................................... l 2 6. Comics eines Umschuldungsplanes warden die Schulden der Klicntenfirma durch Schuldscheine untcrlegt. die nach fin! Jahren fillig werden sollten. Die lirtschaftsprfifungsgescllschaft crhiclt ebenfalls Schuldscheine ffir ihre Jahresabschlussprfifungsarbeiten....... ............ l 2 Kreditcntscheidung (Bitte krcisen Sic cine Hummer ein) 2¢I9 Unabhingigkeitsentscheidung Kreditentscheidung l- Ja, ich glaubc. dass in diescr Situation Maine Kreditentscheieung ist die Wirtschaftsprufungsgescllschaft l- stark negativ bceinflusst unabhingig und unbefangcn ist. 2- leicht negativ bccinflusst 2- Ncin, ich glaubc nicht. dass in diescr 3- unbecinflusst. weder negativ noch positiv Situation die Hirtschaftsprfifungsgc- 4- leicht positiv becinflusst scllschaft unabhingig und unbefangen ist. Sn stark positiv becinflusst Unabhingigkcits- Kreditentscheidung entschcidung (Bittc (Bitte kreisen Sic krcisen Sie cine Ngggcr ein) cine Nummer cin) 7. A war der Controller dcr Firms 2. Br war ein Firmcnangestclltcr und nicht von Aktionircn der Firms zu seincm Posten gewihlt. A's Druder. 5, war cin Wirtschaftsprufer der Jahresabschlussprfifmgsgcsellschaft der Firms 2. abcr B persdnlich war in keiner Heise- mit dcr Jahresabschlussprfifung der Firms Z verbundcn ................ .. I 2 1 OJ 0. ‘e m 3. Sin Wirtschaftsprufer einer lirtschaftsprfifungs- gescllschaft hatte cincn Schwager in lcitender Position in der Verkaufsabteilung einer ncuen Klientenfirma. Der Schwager war nicht an financiellen Entscheidungen seiner Firms beteiligt. Der Wirtschaftsprfifer selbst hatte pcrstinlich nichts mit dcr Jahresabschlusspriifung :u tun............................................ l 2 l 2 3 4 S 9. Eine Hirtschaftsprfifungsgesellschaft vermictete "block time" ihres Computers an cincn Klienten. als der Computer des Klienten Gbcrfordert war. Die Hirtschaftsprfifungsgesellschaft war zuglcich die Abschlussprfifungsfirma des Klienten........... l 2 l 2 3 4 S 10. Der Klient einer Hirtschaftsprfifungsgcsellschaft verkauftc Konzcssioncn (franchises). Zwei Wirtschaftsprufer der Wirtschaftsprfifungsgescll- schaft legten ungefihr ffinf Prozcnt ihres Vermb'gens an ffinfzig Prozcnt der Aktien der Firms §_an. Die Firms 5 hattc einc Konzcssion von dem Klicnten erworben. Mit Ausnahme dcr Auszahlung eines besti-ten Prozcntsatzcs vom Umsatz an den Klienten arbeitetc die Firms 5 sclbststindig und unabhingigl OJ .... N H ‘- VI 11. Bin Wirtschaftsprfifer einer Wirtschaftsprfifungsge- scllschaft bcsass ein Prozcnt der Aktien der Firms B. deren Tochtergesellschaft A_cin kfinftiger Klient Her Uirtschaftsprfifungsgescllschaft warden sell. Der lirtschaftsprfifer, dcm diese Aktien gehfirten. ist in keiner Weisc an den Abschlussprfifungsarbcitcn beteiligt ...... ................................... 1 2 1 2 3 1 s 12. Ein Nirtschaftsprflfer einer Wirtschaftsprfifungsgc- scllschaft bcsass ein Prozcnt dcr Aktien der Firms ‘3. deren Tochtcrgesellschaft A_ein kfinftiger Klient der Uirtschaftsprfifungsgcsellschaft werden soll. Der Nirtschaftsprfifcr, dem diese Aktien geh8rtcn. wird als der Prfifungsleiter der Abschlussprfifung dcr Tochtergescllschaft A’fungieren............... l 2 l 2 3 4 5 13. Ein lirtschaftsprfifer einer Nirtschaftsprfifungs- gesellschaft war ebenfalls als Rechtsanwalt so: cincn Klienten titig. genauer gesagt, er vertrat den Klicnten in alien Rechtsangclegcnheiten. Ffir diesen Dienst erhielt er Gebfihren von dem Klienten. Ebenfalls crhielt er von dcr Nirtschafts- prfifungsgescllschaft Gebfihrcn fur die Jahresabschlussprufung, da die lirtschaftsprfifungsgesellschaft der Abschlussprfifer der Klientenfirma war... .......... I 2 I 2 3 4 S -2- 250 ahingigkcitscntschcidung Kreditcntschcidung 1- Ja, ich glaube, dass in diescr Situation Heine Kreditentscneidung ist die Wirtschaftsprufungsgesellschaft l- stark negativ bccinflusst unabhangig und unbcfangcn ist. 2- leicht negativ beeinflusst 2a Nein. ich glaube nicht. dass in dicser 3- unbecinflusst. wedcr negativ noch positiv Situation die Wirtschaftsprfifungsge— 4- leicht positiv bccinflusst sellschaft unabhingig und unbcfangcn ist. 5- stark positiv bccinflusst Unabhingigkcits- Kreditcntschcidung entscheidung (Bitte (Bittc kreiscn Sic kreiscn Sic cine Nummcr cin) cine Hummer ein) 14. Bin Wirtschaftsprufer einer Hirtschafts- prfifungsgesellscheft besass Aktien einer kfinftigcn Klicntcnfirma. Seine Wirtschafts- prfifungsgescllschaft sell die Jahresabschluss- prfifung durchfflhrcn. Bitte beurteilen Sic die folgcndcn Situationen fur sich etrcnnt. Situation A. Der Nirtschaftspffifcr besass nur sehr wenige Akticn der Klientenfirma (weniger als ein Prozcnt seines . Vermfigens) ............................ . ..... l 2 l 2 3 4 S Situation 8. Der Wirtschaftsprufer besess drci Present dcr Akticn der Klientcnfirma (ungefihr zchn Prozcnt seines Vcrmdgcns) ..... 1 2 1 2 3 4 5 Situation C. Der Hirtschaftsprfifcr besass zehn resent der Aktien dcr Klientenfirma (ungefihr zchn Prozcnt seines VermBgens) ..... l 2 l 2 3 4 S 15. Eine Bank erwarb cincn bcdeutcnden Tcil dcr Akticn der Firms 5, genugcnd um cincn erhcblichen Einfluss auf die Gcschaftsffihrung auszuubcn. Die Bank besass ausserdcm Aktien einer lP-Cescllschaft, welche damit beauftragt war, die Jahresabschlussprufung der Firms S durchzufuhren. Bitte beurteilen Sie die folgenden Situationen fur sich getrcnnt. Situation A. Die Bank bcsass ungefahr 10 prozent dcr Akticn der Wirtschaftspru- fungsgescllschaft..... ......... .............. l 2 l 2 3 4 S Situation 3. Die Bank besass zwischen ll und .4 Present dcr Aktien der Wirtschafts- prfifungsgescllschaft ..... .. ........... ....... l 2 l 2 3 4 S Situation C. Die Bank besass zwischen 25 un 49 Prozcnt dcr Akticn dcr Wirtschafts- prufungsgescllschaft........ .......... ...... l 2 1 2 3 4 5 Situation D. Die Bank bcsass gcnau 50 Prozcnt er ticn dcr Nirtschaftsprufungs- gescllschaft............ . .. .. . ........... l 2 l 2 3 4 S Situation E. Die Bank bcsass mehr als 50 rozent der Akticn der Wirtschaftsprufungs- gesellschaft........2........................ l 2 l 2 3 4 5 16. Bin Hirtschaftsprfifer einer Nirtschaftsprfifungs- gcscllschaft war ein Mitglicd dcs Aufsichtsrats der Firms L. Die Firms L war cine der grosstcn Liefcrantcn der -Firma M. Die Wirtschaftsprufungsgcscllschaft_ war beauftragt. die Jahresabschlussprufung dcr Firms M durchzufuhrcn .................... ..... ..... . ...... l 2 l 2 3 4 5 17. Bin gewisser Teil dcr Einnahmcn einer lirtschaftsprufungsgcsellschaft bestand aus Abschlussprufungsgebuhrcn einer einzelncn Alientcnfirma. Dittc beurteilen Sie die folgendcn Situationen ear sich getrcnnt. Die chfihrcn van dcr einzelncn Klientcn irma betrugen von den Gesamteinnahncn den folgendcn Prozcntsatz: Situation A: ungcffihr 5 Present dcr Ccsamtcinnahmcn....... ........ ...... l 2 l 2 3 4 5 Situation 3: ungcffihr 10 Present der Gesamtcinnahmcn ..................... l 2 I 2 3 4 5 Situation C: ungefihr 25 Prozcnt der Gesamteinnahmen ....... ........ ...... I 2 I 2 3 4 S Situation D: ungefaxr so Prozcnt dcr Gcsamtcinnahmen..... ................ l 2 l 2 3 4 5 Situation E: ungcfihr 75 Prozcnt der Gesamteinnahmen.. ................... l 2 l 2 3 4 5 .3. 3. 251 Hie viclc Jahre Berufserfahrung habcn Sic in Kreditbereich? (Bitte runden Sic ab) Jahre Hie vertraut sind Sic mit den Prfifungsaufgaben dcr Wirtschaftsprufer? (Bitte kreiscn Sic cine Hummer ein). Nicht vertraut Schr vcrtraut l 2 3 4 S Helche Bcdcutung messen Sic der Unabhingigkeit und Unbefangenheit dcr Nirtschaftsprufcrl-gcscllschaft bei? (Bittc kreiscn Sic cine Numeer cin). leine Bedeutung Cressc Bedcutung l 2 3 4 5 Sci ungefaheric viclen Ihrer Kreditcntscheidungcn benutzcn Sic tcsticrtc Jahresabschlusse? (Bittc kreiscn Sic cine Nummer cin). o_t_ 1-254 26- set 51- 751 76- 1001 1 2 3 4 s Raum re: zusitzlichc Beocrkungen Falls Sic an der Zuscndung dcs Ergcbnisses dicscs Ferschungsvorhabcns intercssicrt sind. bittc ich Sic um Angabc Ihrer Addressc. Ich dankc Ihnen ffir Ihre Mfihe und Bereitschaft sich bei diescm Persehungsprejekt zu untcrstfitzcn. /' '/ ‘ .0 //"TS ./"/z:/:7 z’/’ L/’ [-Nr _ . ..l.’ 1%. Fins Jay Dykxhoorn (Certified PuBIié Accountant) -4- 252 English Translation A STUDY OF AUDITOR-CLIENT RELATIONSHIPS Each of the following situations involves a different relationship between an accounting firm and its client. Please evaluate each situation to determine whether you think an accounting firm would be considered independent (unbiased) or ngt_independent (biased) with respect to a year-end audit of the client involved. Please also indicate how your lending decision would be affected. Please note that the independence of a Wirtschaftsprfifer not only deals with his ability to make objective and unbiased audit decisions but also, as the Wirtschaftsprfiferkammer in its Directives mandates, that there are no circumstances that may suggest that the auditor's appearance of independence may be impaired. Assume that the accounting firm in each of the following situations is a typical accounting firm. Also assume that the client is one of your loan prospects. Please evaluate each of the following situations described in this questionnaire separately. £Sample: Directors of Loan Departments (Leiter der Kreditabteilung) 253 Please use this key for your answers Independence Decision ls Yes, I think the accounting firm is independent (unbiased) in this situation. 2: No, I don't think the accounting firm is independent (unbiased) in this situation. Independence Decision (Please circle one number) An accounting firm had its office in a building which was owned by a client. The accounting firm occupied approx- imately 25 percent of the available space in the building, and the client occupied the remainder.. ..... . ........... 1 In addition to the audit, an accounting firm provided services for the client which included maintaining the journals and ledgers, making adjusting entries and preparing financial statements ....... I In order to keep certain information confidential, the client had the accounting firm perform the following services in addition to the audit: (a) prepare the executive payroll (b) maintain selected general ledger accounts in a private ledger ........ 1 A partner in an accounting firm managed a building owned by an audit client ...... 1 From the books of original entry, client personnel prepared printed tapes that could be read on an optical scanner and sent the tapes to the accountants' office. The accountants forwarded the tapes to a service bureau. The accountants received the print-outs of the financial statements and general ledgers and sent them to the client. The accountants did not edit the input data prior to transmission to the service bureau. The accountants provided this service in addition to the audit..... Pursuant to a plan of recapitalization, the existing debt of the company was exchanged for five-year promissory notes. The accounting firm received the same kind of promissory notes in payment of its audit fee ........ 1 Lending Decision The circumstances are such as to l- greatly impair loan prospect 28 slightly impair loan prospect 38 have no effect on loan prospect 4. slightly improve loan prospect S: greatly improve loan prospect Lending Decision (Please circle one number) 2 l 2 3 4 S 2 1 2 3 4 5 2 l 2 3 4 5 2 1 2 3 4 S 2 1 2 3 4 S 2 1 2 3 4 5 254 Independence Decision l- Yes, I think the accounting firm is independent (unbiased) in this situation. 2- No, I don't think the accounting firm is independent (unbiased) in this situation. 10. 11. 12. 13. Lending Decision 1- greatly impair loan prospect 2- slightly impair loan prospect 3- have no effect on loan prospect 4- slightly improve loan prospect S- greatly improve loan prospect Independence Decision Lending Decision (Please circl A was the controller of Company 2. He was not an elected officer nor did he have any stock holding in Company 2. A's brother, 8 was a partner in the public accounting firm that audits Company Z's books. However, 8, was not the partner in charge of the audit... A partner in a public accounting firm had a brother-in-law who was sales vice presi- dent-for a recently acquired client. The brother-in-law was not directly involved in the financial affairs of the company and the partner was not connected with the audit in any way ...... ...... ........... An accounting firm rented block time on its computer to a client when the client's computer became overburdened ......... ........ A client of an accounting firm was engaged the business of selling franchises. Two pa ners of this accounting firm invested appro imately five percent of their personal fort e one number) (Please circle one number) D in rt- x- unes to buy one half of the stock of a corporation which held a franchise granted by this client. Except for the payment of a percentage of s ales to the franchisor client, the franchise oper- ated independently ......... ................ A partner in an accounting firm whose propo client A was a wholly owned subsidiary of corporation 8, owned one percent of the sto of corporation 3. The partner who owns the stocks would not in any way be involved wit the year-end audit.... ............... . ..... A partner in an accounting firm whose propo client A was a wholly owned subsidiary of corporation B, owned one percent of the stock of corporation B. The partner who owns these stocks would be in charge of the year-811d lUdit. eeeeee eeeeeeeoeeeeeeeeeeee A partner in an accounting firm (qualified as a lawyer) also acted as general counsel for an audit client. He received fees for such legal services and, through the ac- counting partnership,for accounting ser- vices rendered concurrently. ..... .......... .. l 2 l 2 3 4 S sed ck se h .. l 2 l 2 3 4 S sed 255 Independence Decision 1- Yes, I think the accounting firm is independent (unbiased) in this situation. 2- No, I don't think the accounting firm is independent (unbiased) in this situation, Lending Decision I8 greatly impair loan prospect 2- slightly impair loan prospect 3- have no effect on loan prospect 4- slightly improve loan prospect S- greatly improve loan prospect Independence Decision Lending Decision (Please circle one number) (Please circle one number) 14. A partner in an accounting firm owned stocks of a proposed client for which he was engaged to do the year-end audit. Consider each of the following situa- tions separately. Situation A. The partner owned a very small number of shares of the client amounting to less than one percent of his net worth .................. ..... Situation B. The partner owned 3 percent of the client' 5 stock amounting to 10 percent of his net worth...... .......... Situation C. The partner owned 10 percent 0 the client's stock amounting to 10 percent of his net worth.......... ..... .. 15. A bank acquired a large number of shares of company S, large enough to enable the bank to significantly influence the management 0 company S. In addition, the same bank also owned shares of the auditing firm that was engaged to perform the year-end audit of company 8. Consider each of the following situations separately. Situation A. The bank owned approximately 10 percent of the outstanding stock of the auditing firm ....... .... ...... ....... Situation 3. The bank owned between 11 and 24 percent of the outstanding stock of the auditing firm ...... ...... ........... Situation C. The bank owned between 25 49 percent of the outstanding stock of the auditing firm. ....... .......... Situation D. The bank owned exactly 50 percent of the outstanding stock of the auditing firm ..... . ..... ..... Situation E. The bank owned more than 50 percent of the outstanding stock of the auditing firm............ ..... .... 16. A partner of an accounting firm was also a member of the Supervisory Board of Corpor- ation L. Corporation L was one of the lar- gest suppliers of Corporation M. The ac- counting firm was engaged to perform the year-end audit of Corporation M... ......... 17. A certain portion of an accounting firm's revenue consisted of audit fees from one particular client. Consider each of the following situations separately. The fees . l 2 1 2 3 4 S . l 2 1 2 3 4 S l 2 1 2 3 4 S f 1 2 l 2 3 4 S . 1 2 l 2 3 4 S . l 2 1 2 3 4 S l 2 l 2 3 4 S l 2 1 2 3 4 S . l 2 l 2 3 4 5 256 from this particular client represented approximately: Situation A: 5 percent of total revenue 1 2 l 2 3 4 Situation B: 10 percent of total revenue 1 2 l 2 3 4 Situation C: 25 percent of total revenue 1 2 l 2 3 4 Situation D: 50 percent of total revenue 1 2 l 2 3 4 Situation B: 75 percent of total revenue 1 2 1 2 3 4 'Rathe nearest year, how many years of experience do you have in the credit area? years How familiar are you with the audit work of Wirtschaftsprflfer? (Please circle one number) Not familiar Very familiar l 2 3 4 5 What percentage of your lending decisions involve the use of audited financial statements? (Please circle one number) 21' l-25% 26-50% 51-75% 76-100% 1 2 3 4 5 Space for additional comments UNUIMU‘U'I If you would like to receive a summary of the research results, please give your address below. Thank you very much for your cooperation. Hans Jay Dykxhoorn, C.P.A. APPENDIX C COVER LETTER, FOLLOW-UP LETTER AND QUESTIONNAIRE MAILED T0 LEITER DER WERTPAPIERABTEILUNG 257 258 MICHIGAN STATE UNIVERSITY Guevara scwoOL or wsmrss mums-rumor: em unsmo - mamas - «m mom or Accommnc e mam ADMINISTRATION November 25 , 1977 Sehr geehrter Herr Leiter der Wertpapierabteilung! Die unabhangige und objektive Ausfibung des Wirtschaftsprfiferberufes ist von grosser Bedeutung ffir die Funktion der deutschen und inter- nationalen Wirtschaftsgemeinschaft. mr. Hans Jay Dykxhoorn. Certified Public Accountant and zur Zeit Doktorand an der Graduate School of Business at Michigan State University. ffihrt im Rahmen seiner Doktorarbeit eine Studie aus. die sich mit der Unabhéngigkeit und Unbefangenheit der Wirtschafts- prufer befasst. Mr. Dykxhoorn hofft, dass seine empirische Resultate zu einem besseren Verstandnis des Begriffes der Unabhangigkeit auf dem Gebiet der Wirtschaftsprfifung in Theorie und Praxis ffihren warden. Der beigeffigte, anonyme Fragebogen wurde in der Absicht aufgesetzt. nicht nur die Meinungen von Wirtschaftsprfifern. sondern auch die Ansichten von beteiligten Dritten. die mit der Handhabung von Jahresabschlfissen vertraut sind, zu ermitteln. Ich dart Ihnen versichern, dass alle Daten und Angaben streng vertrau- lich behandelt warden und die Resultate nur in Tabellenform erschei- nen warden. Bitte benutzen Sie den beigeffigten, adressierten und frankierten Briefumschlag ffir die Rucksendung des ausgeffillten Pragebogens. Die Nummer auf der Rfickseite dieses Briefumschlages dient der Eingangskontrolle. Falls Sie an der Zusendung des Ergeb- nisses dieses Forschungsvorhabens interessiert sind. bitten wir Sie um Angabe Ihrer Adresse. Wir hoffen, das Sie ungefahr 15-20 Min. zur Verffigung haben, da wir Ihrer Mitarbeit an dieser Studie erhebliche Bedeutung beimessen und Ihre Angaben mit grossem Interesse entgegensehen. mr. Dykxhoorn hofft, wfihrend seines kurzfristi en Anfenthalts in Deutschland (vom 25. November bis 31. Dezember die Rucksendungen der Fragebagen an die angegebene Adresse zu_verfolgen. Ich bitte Sie deshalb. den angegebenen Zeitraum zu berucksichtigen. Nit freundlichen Grfissen Anlage WW Dr. Harold M. Sollenberge . C.P.A. Professor and Chairman. Department of Accounting and Financial Administration 259 MICHIGAN STATE UNIVERSITY .(BIIADUA IE SCHOOL OF BUSINFSS ADMINISTRATION HAS l' tANSINh ' MICHIGAN ' “24 Dh'ARTMENT 0' ACCOUNTING & FINANCIAL ADHINISIRA “ON 1 2 . 1 2 . 1 977 mein Schreiben vom 25.11.1977 Sehr geehrter Herr Leiter der Wertpapierabteilung, ich erlaubte mir, Ihnen vor zwei Wochen im Rahmen einer Doktorarbeit, die die Beziehung zwischen Wirtschafts- prflfer und Klientel zum Thema hat. einen Fragebogen mit der Bitte um Rucksendung zuzusenden. Leider konnte Ihr Beitrag bis heute noch nicht zu den be- reirs eingetroffenen und ausgefiillten Pragebbgen gezahlt werden. Ihre Mitarbeit an diesem Forschungsprojekt ist von groBer Wichtigkeit, da die Qualitat des Ergebnisses ohne Ihren Beitrag im Wart erheblich gemindert sein wfirde. Ich nehme an, daB der Fragebogen nicht in Ihre Hande ge- langt ist. Aus diesem Grunde fibersende ich Ihnen in der Anlage noch einmal ein Exemplar dieses Fragebogens mit der freundlichen Bitte, diesen beantwortet zurflckzusenden. Bin adressierter Briefumschlag ist beigefflgt. Schon heute mochte ich Ihnen fflr Ihre wertvolle Mitarbeit herzlich danken. Hit freundlichen GrfiBen ,- 1/ t..- --s—m— - \- ’4 f ’ Hans Jay Dykxhoorn, C.P.A. Michigan University z.Zt. Korner StraBe 10 4250 Bottrop —Deutschland Anlage 260 Doctoral Dissertation Research Michigan State University Return Questionnaire to: Hana Jay Dykxhoorn. C. P.A .Z . Koernerstrasae lo “250 Bottrop dent Germany 9‘ tud e d r w t a " r - e e cha t-Kl ntel Mensa Jede der folgenden Situationen beachreibt ein beatimmtes Verhaltnis zwischen einer Wirtschaftsprufumgsgesellschaft und einem ihrer Jahresabschluasklienten. Bitte uberpriii'en Sis jede einzelne Situation. um zu entscheiden. ob Sie glauben. daes cine Wirtschafts- prufungsgesellschaft in jedem Pal i . e nic t i und nic cht mbe e ist. besonders 1m Hinblickr auf die Jahresabschlusspru 'fung. B tte markieren Sie ebenfalls. in welchem Masse Ihre Investmententscheidung in jedem einzelnen Pall beeinflusst wire. Bitte beachten Sie. daee die Unabhangigkeit und Unbefangenheit eines dirtschaftsprufers sich nicht nur aufd ePahigkeit bezieht. Objek- tive und unvoreingenommene Entscheidungen in Verbindumg mit der Abschlussprufung zu treffen. sondern auch darauf. wie es die Wirtschaftspruferkammer in ihren Richtlinien vorschreibt. dass kein sac chlichv munftiger Grund besteht, aus dem die Besorgnis der Befangenheit abgeleitet werden kann. Bitte stellen Sie sich vor. daas in jeder der folgenden Situationen die genannte Wirtschaftsprufungsgesellschaft em etypische Wirt- schaftsprufungsfirma darstellt. und daas der erwahnte Klient. (oder die erwahnte Klientenrirma) fur eine eventuelle Kapitalanlage in Frage kame. Bitte beurteilen Sia Jede der folgenden Situationen. welche auf den nachsten drei Seiten diesee Fragebogens beschrieben sind. fur sich getrennt. Sample: Directors of Investment Funds (Leiter der Wertpapierabteilung) 261 Ditte benutzen Sie diesen Schlu'ssel ffir Ihre Antwortje_n. Unabhingigkeitsentscheidung 1' Je. ich gleube. dess in dieser Situation die Wirtschaftsprfifungsgesellscheft unethingig und unbefengen ist. 2' Nein, ich gleube nicht. dess in dieser Situation die Htrtscneftsprfifungsge- sellscheft unebhingig und unbefengen ist. Investmententscheidggg Meine Investmententscheidung ist l- Stark negativ beeinflusst 2- Leicht negativ beeinflusst 3- Unbeeinflusst. weder negativ noch positiv 4- Leicht positiv beeinflusst 5- Stark positiv beeinflusst A. 1. Unebhingigkeits- entscheidung (Bitte kreisen Sie eine Nun-er ein) Nun-er ein) Des zero einer Wirtschaftsprfifungsgesell- scheft befand sich in einem Gebiude. des einer Klientenfirme geharte. Die Wirt- schaftsprfifungsgesellschaft verffigte flier mgefaIr 25 Prozent dos vorhandenen Ifiroraumes im Gebiude und der Klient benutzte den restlichen BGroraum..... ............ Eine flirtscheftsprfifungsgesellscheft ffihrte ear einen Klienten nicht an: die Pru‘fmg des Jahresabschlusses durch. sondern ibte auch weitere Dienstleistungen aus. einschliesslich allgeeeiner Ffihrung der Journale und Heuptbficher, Abschluss- buchungen und Anfertigung der Jehresbilanz ....... Zwecks Hendhabung vertraulicher Informationen beauftragte eine Klientenfirma eine Wirt- scheftsprfifungsgesellschaft nicht nur Efir die Jahresabschlussprfifung. sondern auch fir die folgenden Dienste: (a) eonatliche Gehaltsbuchffihrung der geschiftsffihrenden Angestellten (b) Ffihrung bestimlter Konten in einem privaten luchffihrungsjournel.................. Ein-Angestellter in einer flirtseheftsprfifungs- gesellscheft mit fflnf Jehren Prfifungserfehrung vernaltete peranlich ein Gebiude. das einem ihrer Jehresebschlussprfifungsklienten geharte ...... ..... ............................... Die Angestellten eines Klienten fertigten von verschiedenen Journalen (afichern) Computerlochstreifen an, welche mit einem Optical Scanner gelesen werden konnten. und schickten diese Lochstreifen zum Biro ihrer Abschlussprfifer. Die lirtschafts- prflfungsgesellschaft sandte die Lochstreifen in unverinderter Form weiter :u einem Computer Service. Die Wirtschaftsprfifungs- gesellschaft erhielt die gedruckten Ergebnisse des Jahresabschlusses und Auszfige der Heuptbficher von dem Computer Service zurdck und schickte sie zu ihree Klienten. Die Virtschaftsprfifergesellschaft verrichtete diese Arbeit zueltzlich zu der Jahresabschluss- prfifhng. ..... ............ Gemiss eines Umechuldungsplenes wurden die Schulden der Klientenfirmm durch 'Schuldscheine unterlegt. die nech ffinf Jehren £8111: werden sollten. Die flirtschaftsprfifungsgesellschaft erhielt ebenfalls Schuldscheine fur ihre Jahresabschlussprfifungsarbeiten ............. ....... l 2 l 2 3 4 .1- Investmententscheidung (Ditte kreisen Sie eine .. l 2 1 2 3 4 .. I 2 I 2 3 4 .. I 2 1 2 3 4 .. l 2 I 2 3 4 U! Unabh'ingigkeitsentscheidun l- Ja. ich glaube. dass in dieser Situation die Nirtschaftsprufungsgesellschaft unebhingig und unbefangen ist. 2- Nein. ich glaube nicht. dass in dieser Situation die Wirtschaftsprfifungsge- sellschaft unebhingig und unbefengen ist. kreisen Sie eine Mum-er ein) Er war ein Firmenangestellter und nicht von Aktioniren A war der Controller der Firms 2. \l I der Firms zu seinem Posten gewihlt. A's Bruder. 3, war ein Wirtschaftsprufer der Jahresabschlussprfifungsgesellschaft der 2(52 Investmentgptscheidung Heine Investmententscheidung ist l- stark negativ beeinflusst 2- Leicht negativ beeinflusst 3- unbeeinflusst. weder negativ noch positiv 4- leicht positiv beeinflusst S- stark positiv beeinflusst Unabhzngigkeits- entscheidung (Bitte Investmententscheidung (Bitte kreisen Sie eine Nummer ein) Fires 2. abeerersb‘nlich war in keiner Weise mit der Jahresabschlussprufung der Firms 2 verbunden....... ..... . ..... ................. 000000.01 2 1 z 3 ‘ S 8. Ein Wirtschaftsprufer einer Wirtschaftsprfifungs- gesellschaft hatte einen Schwager in leitender Position in der Verkaufsebteilung einer neuen Klientenfirma. Der Schwager war nicht an finanz iellen Entscheidungen seiner Firms beteiligt. Der Wirtschaftsprufer selbst hatte peranlich nichts mit der Jehresabschlussprufung :u cm OOOOOOOOO 000 ........... 00000000000000 0. 000000 0 1 he H N be a. U. 9. Eine Nirtschaftsprfifungsgesellschaft vermietete "block time" ihres Computers an einen Klienten. als der Computer des Klienten fiberfordert war. 10. Die Nirtschaftsprufungsgesellschaft war zugleich die Abschlussprflfungsfirma des Klienten.. ...... .. Der Klient einer Hirtscheftsprfifungsgesellschaft verkaufte Konzessionen (franchises). Zwei Wirtschaftsprufer der Wirtschaftsprufungsgesell- fJ schaft legten ungefahr funf Prozent ihres Vermogens an funfzig Prozcnt der Aktien der Firms K an. Die Firms K hatte eine Konzession van den Klienten erworben. Mit Ausnehme der Auszehlung eines bestimmten Pretentsatzes voe Umsatz an den Klienten arbeitete die FirmaK K _selbststandig und unabhengig.. I 2 1 OJ 04 ‘- Ul ll. Sin Wirtschaftsprufer einer Wirtschaftsprfifungsge- sellschaft besess ein Prozent der Aktien der Firms 8. deren Tochtergesellschaft A ein kunftiger Klient der Wirtschaftsprufungsgesellschaft werden soll. Der Wirtschaftsprufer, dem diese Aktien gehorten, ist in keiner Weise an den Abschlussprufungsarbeiten beteiligt.. 000000.00 00000000 0 00000 0000000000000000001 2 1 2 3 ‘ s 12. Ein Wirtschaftsprufer einer wirtscheftsprfifungsge— sellschaft besess ein Present der Aktien der Firms B, deren Tochtergesellschaft A ein kunftiger Klient 3hr wirtschaftsprufungsgesellscheft werden sell. Der Wirtschaft: rufer. dem diese Aktien gehfirten, wird als der Prufungsleiter der Abschlussprufung der Tochtergesellschaft A fungieren.......... ....... I 2 I 2 3 4 5 13. Bin Hirtschaftsprufer einer wirtscheftsprufungsge- sellschaft war ebenfalls als Rechtsenwelt fur einen Klienten tatig. geneuer gesagt. er vertrat den Klienten in allen Rechtsangelegen- heiten. von dem Klienten. Fir diesen Dienst erhielt er Gebfihren Ebenfalls erhielt er von der Wirtschaftsprfifungsgesellschaft Gebfihren fur die Jahresabschlussprfifung, de die Hirtschaftsprufungsgesellschaft der Abschlussprufer der Klientenfirme war ...... .2- ...... ... I 2 I 2 3 4 S Unabhingigkeitsentscheidung l- Ja. ich glaube. dass in dieser Situation die Wirtschaftsprfifungsgesellschaft unabhingig und unbefangen ist. 2'- .‘lein. ich glaube nicht. class in dieser Situation die Wirtschaftsprfifungsge- 2(53 sellschaft unabhingig und unbefangen ist. Investmententscheidung Meine Investmententscheidung ist l- stark negativ beeinflusst 2- leicht negativ beeinflusst 3- unbeeinflusst. weder negativ noch positiv 4- leicht positiv beeinflusst 5- stark positiv beeinflusst I4. IS. 16. I7. Unabhzngigkeits- Investmententscheidung entscheidung (Bitte (Bitte kreisen Sie kreisen Sie eine Nun-er ein) eine Nun-er ein) Ein Wirtschaftsprfifer einer Nirtschafts- prfifungsgesellschaft besess Aktien einer kunftigen Klientenfirma. Seine Wirtschafts- prufungsgesellschaft sell die Jahresabschluss- prufung durchfflhren. Bitte beurteilen Sie die folgenden Situationen fur sich getrennt. Situation A. Der Wirtsche tspru er beeeas nur sehr wenige Aktien der Klientenfirma (weniger als ein Present seines Verm'e'gens) ................. ...............l 2 l 2 3 4 5 Situation 8. Der Wirtschaftsprufer besaas drei resent der Aktien der Klientenfirma . (ungefaIr sehn Present seines Verm'égens) . . . . l 2 l 2 3 4 5 Situation C. Der Wirtschaftsprufer besass sehn resent der Aktien der Klientenfirma (ungefihr :ehn Present seines VermBgens).... l 2 I 2 3 4 S Eine Bank erwarb einen bedeutenden Teil der Aktien der Firms 5. genugend um einen erheblichen Einfluss auf die Geschaftsffihrung aussufiben. Die Bank besass ausserdem Aktien einer HP- Gesellschaft. welche damit beauftragt war, die Jahresabschlussprufung der Firma S durchsuffihren. Bitte beurteilen Sie die folgenden Situationen fur sich etrennt. Situation A. Die Bank besass ungefihr lo Present der Aktien der Wirtschaftsprup fungsgesellschaft ...... . .................... I 2 l 2 3 4 S Situation 3. Die Bank besass zwischen 11 um! 24 resent der Aktien der Wirtschafts- prfifungsgesellschaft ..................... .... l 2 l 2 3 4 S Situation C. Die Bank besass zwischen 25 and 49 Present der Aktien der Wirtschafts- prflfungsgesellschaft ......................... l 2 l 2 3 4 S Situation 0. Die Bank besass genau SO Present der Aktien der Nirtschaftsprfifungs- gesellschaft ................................. l 2 l 2 3 4 S Situation E. Die Bank besass mehr als 50 Present der Aktien der Nirtschaftsprfifungs- gesellschaft ................. . .............. . I 2 l 2 3 4 5 Ein Nirtschaftsprfifer einer Wirtschaftsprfifungs- gesellschaft war ein Mitglied des Aufsichtsrats der Firma L. Die Firms L war eine der grassten Lieferanten der Firma M. Die Wirtschaftsprufungsgesellschaft war beauftragt. die Jahresabschlussprufung der Firma M durchsuffihren.. ....... . ........... . ..... ... ..... .. l 2 l 2 3 4 S Bin gewisser Teil der Einnahaen einer NirtschaftsprufungsgeselIschaft bestand aus Abschlussprufungsgebuhren einer einselnen Klientenfirma. Bitte beurteilen Sie die felgenden Situationen ffir sich etrennt. Die Gebfihren von der einzelnen Klientenfirma betrugen von den Gesamteinnahmen den folgenden Presentsats: Situation A: ungefahr 5 Present der Gesamteinnehmen ................. .... l 2 l 2 3 4 S Situation 3: ungeffiir lo Present der Gesamteinnahmen... ........ . ......... l 2 l 2 3 4 S Situation C: ungefihr 25 Present der Gesamteinnahmen ..................... 1 2 I 2 3 4 S Situation D: ungefihr 50 Present der Gesamteinnahmen ....... . ............. l 2 l 2 3 4 5 Situation E: ungefihr 7S Present der Gesemteinnahmen. .................. .. l 2 l 2 3 4 S 2(54 1. Mia viele Jahre Berufserfahrung haben Sie im Investmentbereich? (Bitte runden Sie ab) Jahre 2. Hie vertraut sind Sie mit den Priifungsaufgaben der Wirtschaftsprufer? (Bitte kreisen Sie eine Nu-er ein). Nicht vertraut Sehr vertraut l 2 3 4 5 3. Welche Bedeutung messen Sie der Unabhingizkeit und Unbefangenheit der wirtschaftsprufer/ogesellschaft bei? Keine Bedeutung Grease Bedeutung l 2 3 4 S 4. Bei ungef'ihr wie vielen Ihrer Investmententscheidungen benutsen Sie testierte Jahresabschlusse? (Bitte kreisen Sie eine Nuner ein). 91 I-ZS‘ 26- 50‘ 51-753 76-100‘ I 2 3 4 5 Raua fI'ir susitsliche Beaerkungen Fells Sie an der Zusendung des Ergebnisses dieses Forschungsverhebens interessiert sind, bitte ich Sie In Angabe Ihrer Addresse. Ich danke Ihnen fu'r Ihre We und Bereitschaft aich bei diesel Ferschungsprejekt su unterstu'tsen. m Jay Wkfl'loom. 4e“ / .4- 265 English Translation A STUDY OF AUDITOR-CLIENT RELATIONSHIPS Each of the following situations involves a different relationship between an accounting firm and its client. Please evaluate each situation to determine whether yen think an accounting firm would be considered independent (unbiased) or ngt_independent (biased) with respect to a year-end audit of the client involved. Please also indicate how your investment decision would be affected. Please note that the independence of a Wirtschaftsprufer not only deals with his ability to make objective and unbiased audit decisions but also, as the Wirtschaftsprfiferkammer in its Directives mandates, that there are no circumstances that may suggest that the auditor's appearance of independence may be impaired. Assume that the accounting firm in each of the following situations is a typical accounting firm. Also assume that the client is one of your investment prospects. Please evaluate each of the fellowing situations described in this questionnaire separately. Sample: Directors of Investment Funds (Leiter der Wertpapierabteilung) 266 Please use this key for your answers Independence Decision Is Yes, I think the accounting firm is independent (unbiased) in this situation. 2- No, I don't think the accounting firm is independent (unbiased) in this situation. Independence Decision Ipvestment Decision The circumstances are such as to 1- greatly impair investment prospect 2- slightly impair investment prospect 3- have no effect on investment prospect 4- slightly improve investment prospect S! greatly improve investment prospect Investment Decision (Please circle one number) (Please circle one number) 1. An accounting firm had its office in a building which was owned by a client. The accounting firm occupied approx- imately 25 percent of the available space in the building, and the client occupied the remainder.... ............... 2. In addition to the audit, an accounting firm provided services for the client which included maintaining the journals and ledgers, making adjusting entries and preparing financial statements....... 3. In order to keep certain information confidential, the client had the accounting firm perform the following services in addition to the audit: (a) prepare the executive payroll (b) maintain selected general ledger accounts in a private ledger........ 4. A partner in an accounting firm managed a building owned by an audit client ...... S. From the books of original entry, client personnel prepared printed tapes that could be read on an optical scanner and sent the tapes to the accountants' office. The accountants forwarded the tapes to a service bureau. The accountants received the print-outs of the financial Statements and general ledgers and sent them to the client. The accountants did not edit the input data prior to transmission to the service bureau. The accountants provided this service in addition to the audit............ ..... 6. Pursuant to a plan of recapitalization, the existing debt of the company was exchanged for five-year promissory notes. The accounting firm received the same kind of promissory notes in payment of its audit fee... ..... l 2 l 2 2 l 2 3 4 5 2 I 2 3 4 5 I 2 l 2 3 4 S 2 l 2 3 4 S 2 1 2 3 4 S 267 Independence Decision III Yes, I think the accounting firm is independent (unbiased) in this situation. 2- No, I don't think the accounting firm is independent (unbiased) in this situation. Independence Decision Investment Decision I: greatly impair investment prospect 2- slightly impair investment prospect 3: have no effect on investment prospect 4- slightly improve investment prospect S- greatly improve investment prospect Investment Decision (Please circle one number) (Please circle one number) 7. A was the controller of Company Z. He was not an elected officer nor did he have any stock holding in Company 2. A's brother,B was a partner in the public accounting firm that audits Company Z'a books. However, 8, was not the partner in charge of the audit... 1 2 l 8. A partner in a public accounting firm had a brother-in-law who was sales vice presi- dent for a recently acquired client. The brother-in-law was not directly involved in the financial affairs of the company and the partner was not connected with the audit in any way ......................... l 2 l 9. An accounting firm rented block time on its computer to a client when the client's computer became overburdened ....... . ......... 1 2 l 10. A client of an accounting firm was engaged in the business of selling franchises. Two part- ners of this accounting firm invested approx- imately five percent of their personal fortunes to buy one half of the stock of a corporation which held a franchise granted by this client. Except for the payment of a percentage of sales to the franchisor client, the franchise oper- ated independently .................... . ..... . l 2 1 11. A partner in an accounting firm whose pro- posed client A was a wholly owned subsidiary of corporation 8, owned one percent of the stock of corporation 8. The partner who owns these stocks would not in any way be involved with the year-end audit. ............ l 2 l 12. A partner in an accounting firm whose pro- posed client A was a wholly owned subsidiary of corporation B, owned one percent of the stock of corporation 8. The partner who owns these stocks would be in charge of the year-end audit....... 13. A partner in an accounting firm (qualified as a lawyer) also acted as general counsel for an audit client. He received fees for such legal services and, through the ac- counting partnership, for accounting services rendered concurrently ............... l 2 l 268 Independence Decision 12 Yes, I think the accounting firm is independent (unbiased) in this situation. 28 No, I don't think the accounting firm is independent (unbiased) in this situation. Investment Decision l- greatly impair investment prospect 2: slightly impair investment prospect 38 have no effect on investment prospect 4= slightly improve investment prospect S- greatly improve investment prospect Independence Decision Investment Decision (Please circ 14. A partner in an accounting firm owned stocks of a proposed client for which he was engaged to do the year-end audit. Consider each of the following situa- tions separately. Situation A. The partner owned a very small number of shares of the client amounting to less than one percent of his net worth. ... . .............. Situation B. The partner owned 3 percent of the client's stock amounting to 10 percent of his net worth ................ Situation C. The partner owned 10 percent of the client's stock amounting to 10 percent of his net worth ................ 15. A bank acquired a large number of shares of company S, large enough to enable the bank 1e one number) (Please circle one number) 1 2 1 2 3 4 5 I 2 1 2 3 4 S I 2 l 2 3 4 5 to significantly influence the management of company S. In addition, the same bank also owned shares of the auditing firm that was engaged to perform the year-end audit of company 5. Consider each of the following situations separately. Situation A. The bank owned approximately 10 percent of the outstanding stock of the auditing firm ....................... Situation 8. The bank owned between 11 and 24 percent of the outstanding stock of the auditing firm ....... . .......... Situation C. The bank owned between 25 and 49 percent of the outstanding stock of the auditing firm. .................. Situation D. The bank owned exactly 50 percent of the outstanding stock of the auditing firm ....................... Situation E. The bank owned more than 50 percent of the outstanding stock of the auditing firm .................... 16. A partner of an accounting firm was also a member of the Supervisory Board of Corpor- ation L. Corporation L was one of the lar- gest suppliers of Corporation M. The ac- counting firm was engaged to perform the year-end audit of Corporation M ............ 17. A certain portion of an accounting firm's revenue consisted of audit fees from one particular client. Consider each of the following situations separately. The fees I 2 I 2 3 4 S l 2 I 2 3 4 5 I 2 l 2 3 4 5 1 2 I 2 3 4 S l 2 I 2 3 4 S 1 2 I 2 3 4 5 269 from this particular client represented approximately: Situation A: 5 percent of total revenue... 1 2 l 2 3 4 S Situation B: 10 percent of total revenue.. 1 2 l 2 3 4 S Situation C: 25 percent of total revenue.. 1 2 l 2 3 4 S Situation D: 50 percent of total revenue.. 1 2 l 2 3 4 S Situation E: 75 percent of total revenue.. 1 2 l 2 3 4 S . To the nearest year, how many years of experience do you have in the investment area? years . How familiar are you with the audit work of Wirtschaftsprufer? (Please circle one number) Not familiar Very familiar l 2 3 4 S . How important do you consider the independence of auditors to be? (Please circle one number) Not import ant 2 3 4 S . What percentage of your investment decisions involve the use of audited financial statements? (Please circle one number) 9i 1-251 26-501 51.75% 76-1001 1 2 3 4 5 Space for additional comments If you would like to receive a summary of the research results, please give your address below. Thank you very much for your cooperation. Hans Jay Dykxhoorn, C.P.A. APPENDIX D INTERPRETATION OF THE WIRTSCHAFTSPRUFERKAMMER OF THE AUDITOR-CLIENT RELATIONSHIPS INVESTIGATED IN THIS STUDY 270 271 Berufsrechtliche Beurteilung der Fragen 1 - 17 des Fragebogens der Michigan State University nach MaBgabe der Berufsrichtlinien in der neuesten Fassung Frage 1: Die Konstellation ist berufsrechtlich unerheblich und begrfindet nicht ohne weiteres eine Befangenheit oder Besorgnis der Befangen- heit. Frage 2: Die Fuhrung der Bficher und die Erstellung der Bilanz ist mit der gleichzeitig Tatigkeit als Abschlqurfifer nicht vereinbar. Der Tatbestand wird in den neugefaBten Berufsrichtlinien unmittelbar angesprochen, war aber schon fruher in den Richtungweisenden Feststellungen erwahnt. Frage 3: Der Sachverhalt entspricht rechtlich demjenigen der Frage 2; daraus folgt die gleichartige berufsrechtliche Beurteilung, daB die dort genannten Tatigkeiten nicht gleichzoitig wahrgenommen werden kfinnen. Frage 4: Der Sachverhalt bietet fUr sich allein keinen Grund zum AusschluB des Prfifers; die Verwaltungstatigkeit handelt sich um eine sonstige Beratungstatigkeit, die mit der Prfifung prinzipiell vereinbar ist. Frage 5: Im Innenverhaltnis mag der Geschehensablauf unbedenklich sein, da der Abschlqurufer hier lediglich als Adresse zwischen gepruften Unternehmen und Datenverarbeiter fungiert. Im AuBenverhaltnis tritt er jedoch als derjenige auf, der ffir die Ffihrung der Bacher verant- wortlich ist. Infolgedessen ist aus formalen Grfinden die Tatigkeit als Abschlqurufer ausgeschlossen. 272 Frage 6: Die Art der Bezahlung ist ffir die Beurteilung, ob Abhflngigkeit oder Befangenheit bzw. Besorgnis der Befangenheit gegeben ist, grundsatzlich ohne Bedeutung. Allerdings ist eine Kreditierung des geprfiften Unternehmens durch Stundung des Honorars mitunter bedenklich. Frage 7: Der geschilderte Sachverhalt erffillt weder den Tatbestand des § 164 AktG noch den des § 49 WPO. Frage 8: Die Feststellung zu Frage 7 gilt entsprechend. Frage 9: Die Vermietung der Datenverarbeitungsanlage an einen Mandanten, der geprfift wird, ist im Regelfall berufsrechtlich unerheblich und begrfindet keinen AusschlieBungstatbestand ffir den Abschlus- prufer. Frage 10: Die Fragestellung ist ffir deutsche Verhaltnisse kaum verstandlich, was auch Herrn Dykxhoorn dargelegt wurde. Das aus deutscher Sicht gravierende Problem ist die Verwertung von Insider-Kenntnissen ffir persfinliche Zwecke, was nach Abschnitt IV. Richtungweisende Feststellungen Nr. 3 nicht zulfissig ist. Frege 11 und 12: Hier geht es um die Beteiligung an solchen Unternehmen, die mit dem geprfiften Unternehmen verbunden sind. Nach der Neufassung der Richtlinien ist zundchst nur die unmittelbare Beteiligung am geprfiften Unternehmen mit der gleichzeitigen Funktion als Abschlqurufer unvereinbar. Infolgedessen ist die Beteiligung an verbundenen Unternehmen zur Zeit berufsrechtlich nicht zu beanstanden. FDr die Praxis wird der geschilderte Fall wenig Bedeutung haben, da verbundene Unternehmen meist von ein und demselben Abschlueprufer geprfift werden, das Beteiligungsverbot also jeweils unmittelbar eingreift. 273 Frage 13: Der Sachverhalt ist berufsrechtlich unbedenklich; es handelt sich um den weiten Bereich der Vereinbarkeit von Prfifung und Beratung. Frage 14: Nach der Neufassung der Richtlinien ist die Beteiligung am gepruften Unternehmen grundsfitzlich unzulassig, so daB alle drei Alternativen rechtlich gleichmasig zu beurteilen sind. Frage 15: Es handelt sich um das Problem der Verbundenheit im Sinne des Aktienrechts. Nach der derzeitigen gesetzlichem Regelung sind die Situationen von A bis D berufsrechtlich ohne Bedeutung, da eine Verbundenheit nicht vorliegt, sofern nicht besondere Umstande eine solche Verbundenheit indizieren. Es wird insoweit auf die jungste Entscheidung des Bundesgerichtshofs in Sachen VEBA AG verwiesen; der BGH hat in diesem Urteil festgestellt, daB der Bund herrschendes Unternehmen sein kann und daB eine Konzerneigenschaft auch dann . mbglich ist, wenn die Beteiligung unter 50% liegt, jedoch besondere Umstande auf einen herrschenden EinfluB schlieBen lassen. Frage 16: Es handelt sich um keinen Fall des § 164 AktG oder des § 49 WPO. Frage 17: Das Problem des auf einen einzigen Prfifungsmandanten entfallenden Honararanteils ist erstmalig in den Richtlinien angesprochen worden; dabei ist bewuBt darauf verzichtet werden, prozentuale Grenzen festzulegen, wie dies in den angelsdchsischen L3ndern bzw. in Frankreich zur Zeit ublich ist. Zu berficksichtigen ist vor allem, daB es von der Lage des Falles anhfingt, ob eine wirtschaftliche Abhfingigkeit gegeben ist oder nicht. 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