What are the threats and safeguards to auditors independence?

Threats to auditor’s independence

Independence of an auditor is considered to be the main subject in ethical issues. However there are threats that are likely to affect independence of an auditor. These are also referred to as threats that can impair auditor’s independence. Auditors are also provided safeguards that can assist in eliminating or reducing the level of threats imposed to their professional work. The followings are the threats to auditors independence. Safeguards have also been provided in last part of this article.

Self interest threat

There are situations where auditor benefits from financial or non-financial interest from the relationship established with a client. This can be financial (example; too much dependence on client fee), personal (example; expecting employment from client, having a relative who works with a client) or other interests. In these cases, it is likely that an auditor may not act independently in his/her execution of an audit engagement.

Some situations that may cause rise to self interest threat include;

1.     Investment in shares or equity of the client

2.     Probability of getting employment from the client

3.     Non-payment of previous audit fees

Self review threat

This situation occurs when an auditor is about to review and evaluate the work done by himself/herself or fellow team member when arriving at professional judgment during the audit engagement. In this case an auditor cannot maintain objectivity (avoiding bias). In this case, an auditor cannot criticize mistakes made before.

Some situations that may cause rise to self interest threat include;

1.     An auditor reviewing financial systems which he/she previously participated in designing/implementing.

2.     Conducting an audit of financial statements previously prepared by his/her assurance team.

3.     Member of the assurance team was a director of the client organization.

4.     Auditor is providing some other advisory financial and non-financial services to the client organization. Example during underwriting of shares

5.     Auditor has involved in recruiting of senior management team members of the client company

6.     Auditor of financial statements is also involving in providing of internal audit service to the client company.

7.     Auditor performed stock and asset valuation service to the client company and the same items have been included in financial statement under audit review.

8.     Auditor assists and supervises the employee of the client organization in execution of their normal activities.

Advocacy threat

This happens when an auditor act as an advocate on client’s position/opinion.

Examples of this includes

1.     When audit team member is involving in corporate financial services of the client organization such as securities ad shares underwriting

2.     When an auditor also act as a secretary of the client company in compliances, records, registers and advisory issues to client organization

Familiarity threats

Excessive close relationship between auditor and client organization hinders auditor in independent professional judgment. Auditor can easily accept judgment from client organization example of this can be being close to directors or employees of the client organizations.

Examples/cases of this nature include;

1.     Assurance team member having a long term business relationship with client company

2.     Assurance team member being a relative of the person in power/position in the client organization.

3.     Formal partner/senior personnel of the audit firm is now a director in client organization

4.     Assurance team member is a close family member of the senior/director in the client organization.

5.     Assurance team member is a close friend of the assurance client/senior member/director.

Intimidation threat

This is where an auditor is likely to be threatened by the client organization management or other pressure being forced into audit team member from the client organization management. It is also when an auditor is forced to agree with client organization desires.

Cases of this nature are likely to happen in the following situations;

1.     Physical intimidation

2.     Threat of removal of auditors

3.     Threat to reduce audit fee with the same audit scope

4.     Threat to seek second opinion from another audit company in case of disagreements.

Measures/safeguards to minimize these threats

The followings three options can be opted to minimize the level of threat

1.     Safeguards by the profession

These are professional bodies that may employ the use of standards, codes of ethics, professional qualifications, experience and education training.

These include;

Ø  Prohibitions of auditor from providing other non-audit services to the client organization such assisting client organization in developing policies, design, implement and maintain internal controls, assuming management responsibilities, financial statements preparations,

Ø  Ethical trainings and workshops for audit assurance companies

Ø  Taking disciplinary measures for unethical misconducts by auditors.

2.     Safeguards imposed by audit firm itself

These include;

Ø  Developing policies and procedures that govern the internal quality control for all the engagements entered.

Ø  Documenting internal policies and procedures relating with the compliance with the fundamental principles.

Ø  Setting up disciplinary measures against non-compliance as well as identifying if the is any interest or relationship between audit firm/member with the client organization

Ø  Designating senior members with role to oversee and ensuring functioning of the firm quality control

Ø  Declaring the interest of acting in the public interest. Filling forms to declare the conformity with all the legal and professional requirements.

3.     Safeguards imposed within engagement specific safeguards

This is where some cases will be decided basing on the situations that are happening within the client environment when an audit assurance proceeds. These are decided as case-by-case such depending on the existing environments. These include;

Ø  Audit firm involving another audit firm to perform some part/s of the engagement.

Ø  Audit form discussing with those charged with governance of the client organization

Ø  Discussing and disclosing the nature, scope and size of services provided and the fee charged with those charged with governance.

Ø  Audit firm to have some audit staff to review the work performed by other audit staffs of the audit assurance.