Related: How To Appoint An Auditor To A UK Limited Company Threats To Auditor Independence The audit profession has recognised the following threats to auditor independence, many of which are linked to the provision of non-audit services:- Self-interest threat: Where an auditor is financially dependent on the audit client or where an auditor or someone closely associated with him has a financial or other interest in the audit client.
The auditor also depends on the management of the company to secure its re-appointment as auditor. Familiarity threat: The relationship between the auditor and client is long-standing or otherwise is so familiar that the auditor becomes involved in advising the client or acting in a management role.
Self-review threat: A judgment is required of the auditor which demands that previous work of the firm whether audit or non-audit be challenged or re-evaluated. The trust threat: The auditor becomes too trusting of directors and management, thereby preventing a proper testing of management information and representations.
The intimidation threat: The auditor is intimidated by actual or potential pressures from the client or other party. AML Compliance. To make sure this independence, best practices suggest the CAE should report on to the audit committee or its equivalent. For day-to-day administrative purposes, the CAE should report back to the foremost senior executive i. Objectivity may be an attitude that internal auditors should maintain while performing engagements. Objectivity is often presumed to be impaired when internal auditors perform an assurance review of any activity that they had any authority or responsibility within the past year or a period significant enough to influence their judgment or opinion.
The interior auditors should adopt a policy that endorses their commitment to abiding by the Code of Ethics, avoiding conflicts of interest, disclosing any activity that would end in a possible conflict of interest. Related article Using the Work of Internal Auditors.
Search for:. The answer lies in the distinction between conscious and unconscious bias. The profession remains quite susceptible, however, to unconscious bias.
The sociology of professions undertakes a critical examination of professions like accounting to analyze their historical development and their place in modern societies. Terence Johnson, for example, is a sociologist who has theorized various professional arrangements and their power relationships.
The patron chooses the professional, and the patron possesses most of the power, as it controls far greater resources and has the power to hire and to fire. The preferred auditor must not only have the desired technical competence, but also, and perhaps more importantly, values that are socially acceptable to the patron.
This social acceptability is important if the professional desires to be hired and to sustain the relationship. This uneven power relationship and the necessity for the professional to be acceptable to the patron lead to conflicts of interest. Calling the corporation the client when in fact shareholders, creditors, and the investing public are the true clients exemplifies the inherent conflict of interest.
Consider the following example: a faculty member at Penn State teaches advanced accounting and has a reputation for giving low grades. The faculty member, who has impeccable ethical standards, accepts the offer and tutors the student 50 hours during the semester, at the end of which the student receives an A. Is there a conflict of interest? Of course there is!
The professor has a responsibility to the school, the profession, and the other students to grade all exams equally, while at the same time he has the aim of tutoring well the student he coaches, especially if he would like similar engagements in the future.
At a minimum, the situation is rife with unconscious bias. Bazerman, George Lowenstein, and Don A. External auditors seem unaware of the underlying nexus between client and auditor and do not address these challenges to independence. The engagement fee may be characterized as a periodic cash flow in an annuity stream; the value to the audit firm is the present value of this perpetuity. Partners are evaluated positively on the business they keep and the business they bring in, but evaluated negatively on lost clients.
In such a setting, there is pressure—even if only subconsciously—for the partners to accept a little misbehavior here or there to keep or to win the business.
Human subjects seem to choose the outcome they prefer and backfill the thought process to justify the conclusion. They allow preferences to drive decisions, a process of which they are not consciously aware. What might be done to change incentives or institutions to reduce independence violations?
There are at least six possible recommendations. Details about them may be found in Bazerman et al. The first proposal is to mandate auditor rotation, for example every four years. The point is to reduce the coziness of the relationship, thereby reducing the power of management. Then the board can make an informed decision on what to do about the risks. The governing board should be able to ask the internal auditor give them a true picture of what is going on inside their entity.
But if the internal auditor is afraid to tell the truth because they are afraid of losing their jobs, what good are they? How do you keep an internal auditor from being afraid of losing their jobs? You make sure they are structurally independent. A picture is worth a thousand words:. If the internal auditor has to report to the people it is auditing — then these powerful people might squelch the auditors results.
This is just one of the many ways an internal auditor can be shielded from political ramifications when they tell the truth. A gift to the world and everyone who encounters them? You see, when you make the baby or adopt the pet, you have a hard time calling the baby ugly or badly behaved.
This is why internal auditors have to be careful to stay clear of helping management create the subject matter they will later be asked to tell the truth about. They knew they had to properly account for the monies and provide performance measures for the programs lickity split!
And some of them asked for help setting up proper systems from their state auditors.
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