<p class="MsoBlockText" style="margin: 0in 0.5in 0pt;"><span style="font-style: normal; mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">According to the efficient market hypothesis, the market for securities can be described as efficient if the market reflects all available information and reacts quickly to new information (Schroeder and Clark 1998).<span style="mso-spacerun: yes;"> </span>Investors depend on financial statements to help them judge opportunities, risks, and investment alternatives (Revsine, Collins and Johnson 1999).<span style="mso-spacerun: yes;"> </span>This information must be verified by independent sources such as auditors.<span style="mso-spacerun: yes;"> </span>The relationship between auditor and stockholder is based on agency theory (Schroeder and Clark 1998), where the agent (auditor) has a fiduciary relationship with the principle (stockholders).<span style="mso-spacerun: yes;"> </span>Any loss of faith in auditor independence by investors will seriously affect the information value of financial statements.</span></span></span></p><p class="MsoBodyText2" style="margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;"> </span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;">Auditor independence rules must be easy to understand and rigorously enforced or the public's confidence in financial statements will erode.<span style="mso-spacerun: yes;"> </span>This paper will specifically assess the difficulties encountered by large accounting firms such as PriceWaterhouseCoopers (PWC) and Arthur Andersen<span style="mso-spacerun: yes;"> </span>in their efforts to remain independent with respect to their e-commerce clients.<span style="mso-spacerun: yes;"> </span>Many e-commerce companies have innovative and untested business models as well as inexperienced and untraditional business managers.<span style="mso-spacerun: yes;"> </span>Some auditors fail to measure the risk associated with these intangible, knowledge-based attributes.<span style="mso-spacerun: yes;"> </span>In addition, auditor independence may be blurred by the promise of lucrative consulting contracts.<span style="mso-spacerun: yes;"> </span>According to Arthur Levitt, the Chair of the SEC in 1999:</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;"> </span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;">“The dynamic nature of today’s capital markets creates issues that increasingly move beyond the bright line of black and white.<span style="mso-spacerun: yes;"> </span>New industries, spurred by new services and new technologies, are creating new questions and challenges that must be addressed.<span style="mso-spacerun: yes;"> </span>Today, we are witnessing a broad shift from an industrial economy to a more service based one; a shift from bricks and mortar to technology and knowledge.” (Levitt 1999)</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;"> </span></span></p><p class="MsoBodyText2" style="margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;">The objective of this paper is to review current independence rules, assess the difficulty in maintaining independence in the current e-commerce environment, and to make suggestions for improving independence rules.<span style="mso-spacerun: yes;"> </span>In addition, investigations conducted by the Securities and Exchange Commission (SEC) and new legislation such as the Sarbanes-Oxley Act will be reviewed as possible solutions to the problem.</span></span></p>