In any conflict between the interests of the financial community and the reporting firm, an auditor’s responsibility clearly lies with the outside user. On the other hand, the reporting firm that hires and pays the auditor obviously has some incentive to depict its financial conditions in the most favorable light, even if this means occasionally disguising financial weaknesses. In competing for business, auditors will want to avoid a reputation as hardliners who routinely load financial reports with qualified opinions. Does the pressure to compete prevent auditors from being completely independent?

The authors examined two objective indications of auditors’ independence — (1) the willingness of auditors to qualify their opinions and (2) the tendency of clients to switch auditors. Of the 1,800 audits by Big Eight firms during the period 1971 to 1973, 14 per cent resulted in opinions qualified on substantive grounds. In spite of what might be regarded as incentives to the contrary, each auditing firm exhibited a clear willingness to take a position consistent with the interests of outside users.

This willingness will mean little, however, if auditors who issue qualified opinions less frequently can attract clients away from those who qualify opinions more frequently. The 600 client firms represented in the authors’ sample had only 23 auditor switches during the 1971-73 period, and most of these merely reflected growing clients switching from small firms to Big Eight firms. The evidence suggests that auditors have in fact protected their independence.