- Category: Banking & Finance
25 Jul 2014
- Written by Dr. Conchita L. Manabat
FAMILIARITY and self-interest threats, which may impact an individual’s objectivity and professional skepticism, may be created by using the same personnel on an audit engagement over a long period of time.
Code of Ethics for Professional Accountants
In December 2012 the International Ethics Standards Board for Accountants (IESBA) approved a project proposal on long association between the external auditors and the audit clients. The focus of the project is the independent auditor’s objectivity and professional skepticism. The independent auditor represents the primary external check on the integrity of financial statements of an entity. It has been observed that a number of companies tend to maintain the services of their external auditors for a long time that there have been perceptions of negative impact on such long association between external auditors and the audit clients on the former’s independence of mind and in appearance.
The IESBA has conferred to discuss the project in June and December 2013, and April 2014. The main issues considered in the project are:
To strengthen the general framework in the Code surrounding long association;
To communicate with those charged with governance as it relates to partner rotation;
To look into the time served on an audit before becoming a key audit partner;
To review the duration of the cooling-off period; and
To consider the permissible activities during cooling off.
The project has also been discussed as many times by the Consultative Advisory Group for the IESBA. The IESBA is scheduled to meet this month.
Premised on significance of any threat that may put at risk the independence of the external auditors, certain safeguards have been identified to eliminate the threat or reduce it to an acceptable level. A self-interest threat “may be created as a result of an individual’s concern about losing a longstanding assurance client of the firm or a desire to maintain a close personal relationship with the assurance client or a member of senior management.”
Cited as safeguards that may be considered to specific engagements include:
Rotating partners and members of the audit team;
Changing the role of the individual on the audit team;
Having a professional accountant who is not a member of the audit team review the work of the individual;
Adopting quality-control procedures that require the work of managers and other staff on an audit to be directed, reviewed and supervised by more senior personnel; and
Performing regular independent internal quality reviews of the engagement, including an engagement quality-control review.
The following safeguards may also help to reduce the threat to an acceptable level:
Inspections by external organizations such as a regulator or professional body; and
Training in professional standards, including relevant ethical requirements.
In the case of small audit practices with limited number of partners/professionals where rotation of partners may not be feasible, exceptions may be granted by the independent regulators of the profession in the specific jurisdictions. It is expected that appropriate alternative safeguards are put into place.
The IESBA is of the thinking that any change in the rotation requirements will be on the engagement partner only. Perception issues surrounding the rotation requirements are best addressed by focusing on the engagement partner given his/her unique role on the audit. In the latest deliberations on rotation of partners, the audit of a public interest entity is distinguished from that of other entities. The task force recommends that the engagement partner on the audit of a public interest entity be required to observe cooling off for five years after a period of seven years of service compared to the two-year cooling-off period of the engagement partner on audit of other entities. During the cooling-off period, the concerned audit engagement partner will be restricted from engaging in any activity that will influence the outcome of the audit in whatever capacity or dimension.
Whatever may be the collective decisions on the issues, one cannot lose sight of the fundamental reference to the entire project—independence of the external auditor.
Dr. Conchita L. Manabat is the president of Development Center for Finance and is a member of the Consultative Advisory Group for the International Ethics Standards Board for Accountants and the International Auditing and Assurance Standards Board representing the Asian Financial Executives Institutes. She is a past chairman of the International Association of Financial Executives Institutes, where she now serves as chairman of its Advisory Council.