Auditor independence is an important issue which has received considerable attention

since the collapse of Enron, WorldCom and Sunbeam in 2002 and Lehman Brothers

in 2008 in the USA; Bank of Credit and Commerce International in 1991; One.Tel in

Australia in 2001; and Sat yam in India in 2009. In the corporate world, the

importance of this topic comes from the fact that independently-audited financial

statements may result in the generation of true and fair accounting information which

will enable and assist stakeholders to form rational expectations about firms. It will

also result in minimising the agency cost and mitigating the agency problem

(asymmetric information between principals and agents due to remoteness gap). Thus

auditors are expected to monitor the agency relationship as outlined by the agency

theory. However, a lack of independence would lead auditors, who audit financial

statements, to collaborate with firms' managers who prepare these financial

statements. Consequently reliability of these audited financial statements would be

threatened.

Financial statements assist investors in making rational financial decisions if they are

reliable. The reliability of audited financial statements is based, in part, on the nature

and quality of an independent audit. The review of the relevant literature reports

mixed results. It also suggests that the bulk of research is conducted within developed

countries, while little effort is directed to developing countries. This study, therefore,

examines the effects of eight variables which may impact on the independence of

auditors and consequently affect the reliability of financial statements. These

variables include: audit firm size, audit fee size, audit tenure, audit committee, non-

audit services, competition, legal incentives and socio-cultural relationships. 400

questionnaires were distributed to 5 groups which included owners, investors, lenders,

managers and auditors in Libya as a typical developing country. Semi-structured

interviews including 16 respondents were also conducted to complement and enhance

the questionnaire survey results.

The results reveal that users consider auditor independence as an important ground for

reliable financial statements on which they base their decisions. These results

highlight the fact that amongst other variables, the non-availability of auditing

standards in Libya is one of the strongest influences undermining auditor

independence. The results also suggest that across the sub-groups in the sample there

are differences in the relative importance of the variables under study. In addition,

nonparametric tests reveal that these factors have significant impact on the perceived

reliability of audited financial statements. Furthermore, Factor Analysis illustrates the

interrelationship between all variables under investigation. More specifically, the

results suggest that economic, regulatory and country-specific-culture have an impact

on the auditor's independence and the perceived reliability of audited financial

statements.

These results would be useful input for LAAA in developing the accounting

profession and in standards-setting process. The results are also useful input for the

IFAC process in harmonising global accounting and auditing standards. Current users

and potential investors (both local and foreign) may benefit from these findings so as

to be aware and familiar with the characteristics of the Libyan audit market and its

underlying culture.

The Paper discuses the issue of audited financial Statements reliability and independent audit in the context of agency theory