2017-11-30
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1.4 Threats to independence and objectivity
Threats to independence and objectivity may arise in the form of self-review, self-interest, advocacy, familiarity and intimidation threats. Appropriate safeguards must be put in place to eliminate or reducesuch threats to acceptable levels.
Compliance with the fundamental principles of professional ethics may potentially be threatened by a wide range of different circumstances. These generally fall into five categories:
Self-interest (discussed in Section 1.4.1) A self-interest threat is the threat that a financial or other interest will inappropriately influence the professional accountant’s judgement or behavior.
1) Financial interests
2) Close business relationships
3) Employment with an audit client
4) Temporary staff assignment
5) Partner on client board
6) Family and personal relationship
7) Compensationandevaluationpolicies
8) Giftsandhospitality
9) Loansandguarantees
10) Overduefees
11) Contingentfees
12) Highpercentageoffees
· Self-review (discussed in Section 1.4.2)
Self-review threats when a member reviews his or her own work or advice as part of an assurance engagement. There is a great deal of guidance in the ACCA and IESBA rules about various other services accountancy firms could provide their clients and these are discussed below.
1) Recent service with an audit client
2) Provision of non-audit services in general
3) Preparing accounting records and financial statements
4) Valuation services
5) Taxation services
6) Internal audit services
7) Corporate finance
8) IT system services
9) Other services
· Advocacy (discussed in Section 1.4.3)
Advocacy threats arise in those situations where the audit firm promotes a position or opinion to the point that subsequent objectivity is compromised. Examples include commenting publicly on future events in particular circumstances, having made assertions without detailing the assumptions, or acting as an advocate on behalf of an audit client in litigation or disputes with third parties. Advocacy threats might also arise if the firm promoted shares in a listed audit client. Acting in an advocacy role for an audit client in resolving a dispute or litigation when the amounts involved are material to the financial statements on which the firm will express an opinion is not permitted by the ACCA Code. In addition the Code does not allow the appointment of a partner or an employee of the firm as General Counsel for legal affairs of an audit client. Where advocacy threats arise and the work or actions are permitted by the Code then relevant safeguards might include using different departments to carry out the work and making disclosures to the audit committee. Remember, the audit firm has the option to withdraw from an engagement if the risk to independence is too high.
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· Familiarity (discussed in Section 1.4.4)
Having an audit client for a long period of time may create a familiarity threat to independence. The severity of the threat depends on factors such as how long the individual has been on the audit team, how senior the person is, whether the client’s management has changed and whether the client’s accounting issues have changed in nature or complexity.
Possible safeguards include:
· Rotating the senior personnel off the audit team
· Having a professional accountant who was not a member of the audit team review the work of the senior personnel
· Regular independent internal or external quality reviews of the engagement
The rules for public interest entities are stricter. If an individual is a key audit partner for seven years, they must be rotated off the audit for two years. During this time they cannot be on the audit team, and cannot consult with the audit team or the client on any issues that may affect the engagement (including giving just general industry advice).
The Code does allow some flexibility here. If key partner continuity is particularly beneficial to auditquality, and there is some unforeseen circumstance (such as the intended engagement partner becoming seriously ill), then the key audit partner can remain on the audit for an additional year, making eight years in total.
If a client that was not a public interest entity becomes one, then the seven year limit still applies, starting
from the date when the key audit partner originally became the key partner for that audit client. However if
the individual has served the audit client as a key audit partner for six or more years when the client becomes a public interest entity, the partner may continue to serve in that capacity for a maximum of two additional years before rotating off the engagement.
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Finally, if the firm has only a few people capable of being a key audit partner for a public interest client, it is possible for an independent regulator to give permission for an audit partner to remain a key audit partner indefinitely, provided alternative safeguards specified by that regulator are applied (eg external review).
· Intimidation (discussedinSection 1.4.5)
1.4.5 Intimidationthreat
An intimidation threat arises when members of the audit team may be deterred from acting objectively by threats, actual or perceived. These could arise from family and personal relationships, litigation, or close business relationships. These are also examples of self-interest threats, largely because intimidation may only arise significantly when the audit firm has something to lose.
The most obvious example is when the client threatens to sue, or does sue, the audit firm for work that has been done previously. The firm is then faced with the risk of losing the client, bad publicity and the possibility that it will be found to have been negligent. This could lead to the firm being under pressure to produce an unmodified audit opinion in the auditor’s report.
Generally, audit firms should seek to avoid such situations arising. If they do arise, factors to consider are:
· The materiality of the litigation
· The nature of the audit engagement
· Whether the litigation relates to a prior audit engagement
The following safeguards could be considered:
· Disclosing to the audit committee the nature and extent of the litigation
· Removing specific affected individuals from the engagement team
· Involving an additional professional accountant on the team to review work
However, if the litigation is at all serious, it may be necessary to resign from the engagement, as the threat to independence may be too great.
