The Independence and Competence of Auditors

Cédric Lesage, Professor of Accounting and Management Control - April 15th, 2010
Lesage - Indépendance et Compétance

What affects the quality of an audit? Cédric Lesage and Géraldine Hottegindre have answered this question and shown that, contrary to popular belief, a lack of auditor neutrality is not the greatest danger for audit quality. The most harmful factor is a lack of auditor competence. 

Cédric Lesage ©Cédric Lesage

Cédric Lesage is a professor at HEC, where he teaches accounting, ethics, and audit research. He holds a PhD degree in Management from the University of Rennes. A former auditor, (...)

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A company’s shareholders and managers are connected in a principal/agent relationship. Shareholders make resources available and expect organizational leaders to use them profitably; business managers decide how to use resources and account for them in financial reports. To ensure managers have not falsified accounts (i.e., due to an information shortage), shareholders commission external auditors to verify the accuracy of financial statements. Thus, “audits represent a monitoring cost paid by shareholders to ensure the accuracy of information provided by business executives,” Lesage summarizes.


In this context, the auditor’s mission is to detect any significant errors in financial statements and to then reveal them. A good audit thus fulfills two conditions. First, the auditor is competent enough to recognize errors, i.e., he or she is familiar with applicable regulations; secondly, he or she is independent enough to divulge errors, i.e., there are no conflicts of interest between an auditor’s mission and the company he or she is auditing. 


A significant amount of research (mostly Anglo- Saxon) has looked at auditors’ independence, however their competency has rarely been studied. According to Lesage, this is most likely due to the very nature of the audit market in Anglo-Saxon countries, where audits are rarely a legal requirement. As a result, companies that have their accounts audited usually do so deliberately to send a positive message to the market. A company that has its accounts certified to make a show of serious management thus tends to choose a competent auditor. In France, on the other hand, audits are mandatory, even for small businesses. Business leaders tend to view them as a constraint, and auditors’ competence is less of a priority. “There are many small auditing firms (including one-person operations) in France, but their standards are sometimes less stringent than those of large institutions,” Lesage explains. 


Lesage and Hottegindre studied a sample of 161 disciplinary actions pronounced by the French Auditors’ commission. They divided actions into two categories: those which could be interpreted as a result of incompetence (attributable, for example, to a failure to participate in training programs) and those related to lack of independence (for example, when an auditor has a stake in the company he or she is auditing). The researchers then used these results to measure the relative importance of independence and competence in audit quality. They found that approximately 30%of disciplinary actions could be attributed to auditor incompetence and 40%to a lack of independence. They also showed that the two factors are not interdependent. These surprising results “underline the importance of conducting in depth studies of how an auditor’s lack of competence influences the quality of his or her audits,” says Lesage. 


Complementary analysis of disciplinary actions allowed the researchers to demonstrate that in 30%of cases, violations were linked neither to auditors’ lack of independence nor to their lack of competence. This is the case, for instance, when an auditor is found guilty of personal tax evasion. Lesage comments, “Cases like these, involving personal decisions that may nevertheless influence an auditor’s work, have never been examined in academic literature.”

Based on an interview with Cédric Lesage and his article, “Un mauvais auditeur: dépendant et/ou incompétent? Étude exploratoire des motifs de condamnation des commissaires aux comptes en France” (Bad Auditors: Dependent and/or Incompetent? An Exploratory Study on the Grounds for Penalties Against Auditors in France), co-authored with Géraldine Hottegindre, Comptabilité – Contrôle – Audit, December 2009. 


In Anglo-Saxon countries, the market takes care of eliminating the least competent auditors, but in France, this is up to the profession itself. Disciplinary actions are therefore taken to weed out poor performers. But Lesage worries that the very nature of French legislation and mandatory audits may lessen audit quality. Legislators should be greatly interested in this study. They have recently focused on the issue and relieved the smallest business of audit obligations through the law on the modernization of the economy (LME).


Cédric Lesage and Géraldine Hottegindre studied 161 disciplinary actions taken in France from 1989 to 2005 and indexed in the Auditors’ Bulletin (Bulletin des commissaires aux comptes). The data enabled the researchers to analyze decision content and attribute codes reflecting two criteria: auditor competence and auditor independence.