The term ‘independent’ and the concept of auditor independence are often referred to in connection with both internal and external auditors.

However, there is a considerably different meaning, degree and context regarding independence for each.

For internal auditors, auditor independence refers to an attitude that is free from bias or undue influence. It also embodies the reporting structure of an internal audit function, which includes reporting to the audit committee and the CEO, in order to allow for an appropriate level of organizational freedom and a lack of restriction in their work and access to records.

There are often no statutory regulation covering or requiring the independence of internal auditors. Additionally, internal auditors can be employees of the company they serve whereas external auditors cannot be.

While The IIA standards use the word independence to describe internal auditors in certain places, objectivity might be a better word to describe one of the primary characteristics that internal auditors need to exhibit.

Although internal auditors are not independent from the entity, The IIA standards define internal audit as an independent objective and consultative activity designed to add value and improve an organization’s operations.

For external auditors, auditor independence is a much more structured and defined term, as well as a regulatory requirement for performance. External auditors are required to be independent under the following guiding requirements:

• Strict adherence to reporting directly and solely to the audit committee, including having the audit committee responsible for improving the external audit fees and in some cases, pre-approving certain types of services to further ensure independence of the external auditor.

• Prohibitions on the nature and extent of services that can be provided to an audit client, such as internal audit outsourcing, valuation services, book keeping, design of financial systems and other specifically listed services that would undermine the independence of the external auditor.

• Adhering to independence requirements in both appearance and fact

• Not being an advocate for an audit client or having a mutuality of or conflicting interest.

• Scope and extent of audit work must be determined by the auditor alone.

• Not taking on any responsibilities that could be construed to be those of a management function and not being in a position of auditing the external auditor’s own work.

• No direct equity ownership in an audit client.

• Required rotation of certain personnel on audit engagements

• Prohibitions on audit firm personnel at certain levels being hired by the companies they audit for a period of time after they cease to provide services to those companies.

External auditors are required to confirm their audit independence in writing to the audit committee of the companies they audit. Penalties can be levied against external auditors by their respective governing professional body.