AUDITOR INDEPENDENCE

Details
Category: Financial Auditing

There has been much debate recently about the issue of auditor independence. In particular the US Securities and Exchange Commission (SEC) which regulates investment, proposes to make auditor’s independence a large issue.

Independence is something that is both a mater of fact and a matter of appearance. It is important to be independent but it is also important to appear to be independent.

In recent years auditing firms have seen auditing almost as a loss leader, giving access to a client so that the client can be sold all manner of additional services, all of which are the really lucrative ones for the audit firm as a whole. Financial disasters of Enron and WorldCom have concentrated the collective professional minds on how to deal with the issues which have been highlighted by these cases.

What is independence?

The SEC has suggested four principles of independence:

  • An auditor may not have a mutual or conflicting interest with the client

  • An auditor may not audit his own firm’s work

  • An auditor may not function as management or as an employee of the audit client

  • An auditor may not act as an advocate for the audit client

Rules

To ensure both independence and the appearance of independence, rules have been set out in the professional bodies’ ethical codes. Included in the codes are the following matters which impair independence

  • Undue dependence on an audit client as a proportion of fee income

  • Actual or threatened litigation

  • Family or other personal relationship

  • Beneficial interest in shares and other investments

  • Beneficial interest in trusts

  • Loans to or from client

  • The provision of goods and services or hospitality

  • The provision of other services

Provision of Non Audit Services (other services)

The provision of other services, has proved particularly contentious, and this is what concerns us here

  • Book keeping or other services related to accounting records

  • Preparation of financial statements

  • Financial information systems design and implementation

  • Appraisal or valuation services

  • Internal audit services

  • Management functions

  • Obtaining or advising on human resources

  • Broker/dealer services

  • Contingency fee arrangements