RELEVANT TO ACCA QUALIFICATION PAPER P1 AND PERFORMANCE OBJECTIVES 1, 2 AND 3

Independence as a concept in corporate governance
The concept of independence occurs at several points in the Paper P1 Study Guide. It is listed as one of the key underpinnings of corporate governance in Section A1d, it is a crucial quality possessed by both internal and external auditors (Sections B2b and B2c), and it is included in Section E5c as an ethical quality. In corporate governance, independence is therefore important in a number of contexts. It is vital that external auditors are independent of their clients, that internal auditors are independent of the colleagues they are auditing, and that non-executive directors have a degree of independence from their executive colleagues on a board. But what do we mean by ‘independence’ as a concept? Independence is a quality that can be possessed by individuals and is an essential component of professionalism and professional behaviour. It refers to the avoidance of being unduly influenced by a vested interest and to being free from any constraints that would prevent a correct course of action being taken. It is an ability to ‘stand apart’ from inappropriate influences and to be free of managerial capture, to be able to make the correct and uncontaminated decision on a given issue. If, for example, an auditor is a longstanding friend of a client, the auditor may not be sufficiently independent of the client. Given that it is an auditor’s job to act on behalf of shareholders and not the client, the friendship with the client may compromise the auditor’s ability to effectively represent the interests of the shareholders. The auditor may not be as thorough as he ought to be, or he may be influenced to give the benefit of a doubt to the client when he should not be doing so. The same could apply to non-executive directors (NEDs). In some