I don't have specific suggestions for auditor independence. However, as an arbitrator, I have to take into account the IBA Guidelines on Conflict of Interest in International Arbitration available at http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB4QFjAAahUKEwiFypHa-JHGAhWFDqwKHRGIAHg&url=http%3A%2F%2Fwww.ibanet.org%2FDocument%2FDefault.aspx%3FDocumentUid%3De2fe5e72-eb14-4bba-b10d-d33dafee8918&ei=n-V-VcX-G4WdsAWRkILABw&usg=AFQjCNFevNZgKiVw0CZPEmhTtW0tnS2QLA&bvm=bv.95515949,d.b2w

These may be of inspiration for your work. In fact, whenever I teach Int'l Commercial Arbitration, I recommend to my students "to err on the side of caution", namely to treat the waivable red list as non-waivable, the orange list as if it was a waivable red list, i.e. it requires active consent by the parties, and the green list as if it was an orange list, requiring disclosure and passive consent by the parties. Following this recommendation, one can avoid any appearance of possible lack of independence or impartiality.

I hope this is at least somewhat useful.

Thanks Frank. This is a useful link to the legal perspective on arbitration. I wonder there is any literature on how auditors could assess the extent of being close, in proximity,on the relationships with the third parties.

I think back auditor to auditor independence and auditor emotional state and how the use of the Code of Professional Conduct

 Previous studies reveal that there is a relation between independence of the external auditors and the additional services rendered to their audit clients. The audit committee may review any non-audit service agreements with the external auditors to understand the nature and magnitude of relevant fees paid. The committee should examine the non-audit services rendered by the external auditors in order to prevent any conflict of interest or impairment of the external auditors’ independence.

As part of the organization’s corporate governance mechanisms, the audit committee’s meetings with the external and internal auditors enhance the independence of the audit function, supporting the parties’ discussion about management’s errors, irregularities, violations, and fraud. Carcello and Neal (2003) found that audit committees with greater governance expertise, greater independence, and lower stockholdings are more effective in shielding external auditors from dismissal following the issuance of unfavorable report.  

I believe the amount of fees paid may not indicate the extent of independence, but extent of providing non audit services will.

PCAOB allows external auditors to provide tax services as a knowledge spill over. Do you think this is really the case? Or is it just an excuse for the auditors to earn additional revenue? Please share your thoughts on whether these non audit services could jeopardise independence. 

To enhance the external auditors' independence, I think the audit committee should review the non-audit service agreements with the external auditors to understand the nature and magnitude of the relevant fees paid. The committee should also examine these non-audit services to confirm such independence. As long as this is taken into consideration, I think the external auditors may provide tax services or any other non-audit services.

Independence is an ethical requirement for auditors and are required to continuously undertake self review before accepting engagement for the next financial year. It is very controversial subject as engagement partners might opt to adopt "Chinese Wall" by rotating engagement partners to reduce familiarity with client if close relationship had developed. Independence is more of moral obligation than legal one and can only crop up if investors would be grossly injured by auditor's negligence.

Auditor’s independence is the capacity of auditor to act, in mind and in appearance, objectively without influences. Members of the audit groups, network firms, and firms are the public interest elements which determined to be independent of the client (IFAC, 2012, p.46-47). Non-audit service, as an audit quality factor, can have a considerable impact on the auditor’s independence. Most of regulators have stated that non-audit services can lead the auditors to lose their independence in order to capture larger non-audit service (Chen, Elder, & Liu, 2005; Gul et al., 2007; Thornton & Shaub, 2014). As stated by Simunic (1984), auditor engagements, as management consultants, can compromise auditors independence. However, being worried about reputation loss as well as litigation costs can maintain auditors independent (DeFond et al., 2002). Recently, some studies have argued that auditor independence may be impaired through the economic dependency of the auditor to their client (non-audit fees) (Adeyemi & Olowookere, 2012; Akpom & Dimkpah, 2013), and maintaining the audit work (Audit turner) (Carey & Simnett, 2006; Mohamed & Habib, 2014). 

In the current audit environment we have the second coming of consulting services that audit firms have resurrected. To my knowledge, there isn't any financial data on audit firms that also have alternative practice structures. The alternative practice structures are the entities that the consulting services are delivered and give a perceived notion of independence.

Gin, thanks for your question. I will illustrate my reasoning with real experience I had on the ground. We had been commissioned for an audit at a certain client. During our audit, a member of the audit team had established a [very] good rapport with an employee at client's. Assuming it is a non-issue, they were spotted having some drinks (beer) at a local pub by another employee at clients. It happened that the employee who saw the two having good time was a senior manager at clients. S/he decided to use what s/he had seen to rubbish issues raised in management letter and the opinion of the auditors, claiming that someone had influenced the [entire] audit. In this case, I would pre-suppose that the auditors actions/conduct led to their independence being in question. Further, how would you convince the client that you exercised independence of mind when your independence in appearance is in question? I believe outside parties may want not to disentangle the two. Just my thoughts. DM

 With regard to Non-Audit Services (NAS), SOX has undertaken measures to address auditor independence. To promote auditor independence and increase

audit quality, SOX prohibits auditors from performing several specific NAS for financial

statement audit clients, and requires audit committee approval of permissible NAS. While it is interesting to see the list of prohibited NAS, the question of why the provision of NAS becomes relevant if the audit firm are the external auditors. It is interesting to note that Firth (2002) argues that a positive association of audit and NAS fees need not imply auditor independence concerns. This is especially if this association is due to firm-specific factors that increase the cost of both services. However, if these characteristics are controlled for and the association remains strong, auditor-client economic bonding is suggested. - ideas from Omer et al. (2006)

Dr. Mathuva: this is interesting. Depending on the background and compositions of the audit committees, approval of NAS may, in some situations and in some degrees, subject to the committees' favoritism and bias toward certain audit firms. All these may impact upon auditors' independence and objectivity in expressing their opinions. Any comments?

Also, any suggestions on how auditors could project a positive image on independence by appearance? Could the auditors and management go for lunch together? What about playing golfs, families' outings and shopping?

Gin, I would suggest that auditors avoid any action likely to impair their independence. I recall in one audit of a social club I was engaged in, the client offered us access to the gym facility for a month after the audit. After consultations, the engagement partner advised the team not to accept. However, I think taking lunch with client employees during the audit is not a risk to independence. The auditor just needs to be cautious about the kind of discussions they have. DM