User:SarahEinbinder/Auditor independence

Lead
Independence ensures auditors don’t have any financial interest in the firms they are auditing. An auditor is required to be impartial in all aspects of the audit, but must also acknowledge a commitment to fairness to management of the client and any one person who may rely on the independent auditor’s report.

Independence requirements are founded on 4 major standards: (1) An auditor can not audit their own work, (2) An auditor can not participate in the role of management for their client, (3) Relationships that create a shared or opposing interests between client and auditor are not allowed, (4) An auditor is not allowed to advocate for their client.

Article body
Importance of Auditor's Independence

Auditor’s independence creates unbiased audit reports and upholds professional skepticism in the industry. If an auditor’s independence is impaired, the business receding the audit has not fulfilled their obligation of receiving an audit from an independent auditor. Guaranteeing auditor independence is equivalent to ensuring that the company’s income statement is accurately disclosed and categorized.

PCAOB Requirements

PCAOB Auditing Standards apply to CPA firms auditing publicly traded companies. The firm and its persons must be independent throughout the entire audit engagement period. A registered public accounting firm and its employees must adhere to independence standards as prescribed in the AICPA’s Code of Professional Conduct and interpretations and the Standards Nos. 2 and 3 and any interpretations of the Independence Standards Board. Conflicts of interest between an auditor and the firm being audited can create threats such as adverse threats and self-interest threats to a members compliance with the Integrity and Objectively Rule.

AICPA Requirements

AICPA requirements for auditing differ from PCAOB requirements for auditing. AICPA requirements apply to both CPA firms auditing non-public companies and public companies. However, CPA firms auditing non-public companies are not required to follow PCAOB guidelines. The AICPA does not require auditors to issue an opinion on internal control for non-public companies. However, PCAOB does require auditors to issue an opinion on internal control for public companies (AS2201).

Partner Rotation Policies

A study was conducted to analyze the effects of auditor rotation and auditor tenure on companies listed in the Indonesia Stock Exchange. Based on the results from this study, it is shown that auditor rotation has a significant impact on auditor independence (in a positive way). However, auditor tenure has a negative impact on auditor independence. There is evidence that shows the differences in the impact between short-term and long-term tenures on auditor independence. An example of the negative effects a long-term tenure has on auditor independence is the consideration to issue a going-concern opinion. For example, if an auditor has been auditing a firm for over 10 years, they may brush off a large problem in the company and issue a clean opinion because they believe that they are familiar with the company.

For CPA firms auditing publicly traded companies, the lead partner on the audit engagement has to rotate every 5 years and have a 5-year cooling-off period for audits of public firms. Secondary/other partners need 7 years with 2 cooling-off periods for audits of public firms. Additionally, the PCAOB requires CPA firms auditing publicly traded companies to indicate how long the firm has been auditing the company, also known as tenure.

Currently, there is no PCAOB requirement for companies to rotate their audit firm. However, the PCAOB has explored the possibility of making firm rotation a standard in 2011. The PCAOB wanted to see if there were any more ways to ensure auditors could maintain their independence and professional skepticism. In the end, the PCAOB did not decide to enforce mandatory audit firm rotation because there were many findings that were not supportive. For example, it would not be cost-beneficial. However, former Chairman James R. Doty encouraged both supporters and non-supporters of audit firm rotation to continue to research this topic.

However, CPA firms that audit non-public companies are not required to rotate their partners. With this in mind, it is important to consider the quality of the audit. For example, auditors may become subjective if they have been auditing the same firm for a large number of years. Additionally, it is difficult for smaller CPA firms to rotate their partners if there are only a few partners.

Peer Review

Peer review of accounting firms is focused on helping maintain independence within a firm. A peer review is a recurring external assessment of a firm’s quality control system, sometimes referred to as monitoring. This process helps members cultivate and increase audit quality to further advance the uniformity within the profession. For auditors of non issuers, peer review is required once every three years of the firms auditing practice and accounting department. During the peer review process for a nonissuer, members are required to be convinced that the employee’s on the engagement have the ability to manage the assigned services. The firm being reviewed selects an approved CPA firm to conduct their peer review.

Peer review is required once every three years for auditors of less than 100 publicly traded companies every year. The SEC portion is peer reviewed by the PCAOB and the non public portion is peer reviewed by an approved CPA firm, both every three years. For accelerated filers, firms who audit over 100 issuers every year, are required to have a peer review annually, performed by the PCAOB.

Covered Members

The AICPA defines a covered member as the following:

- “an individual on the attest engagement team.

- an individual in a position to influence the attest engagement.

- a partner, partner equivalent, or manager who provides 10 or more hours of non-attest services to the attest client within any fiscal year. Designation as covered member ends on the later of (i) the date that the firm signs the report on the financial statements for the fiscal year during which those services were provided or (ii) the date he or she no longer expects to provide 10 or more hours of non-attest services to the attest client on a recurring basis.

- a partner or partner equivalent in the office in which the lead attest engagement partner or partner equivalent primarily practices in connection with the attest engagement.

- the firm, including the firm’s employee benefit plans.

- an entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in items a–e or two or more such individuals or entities if they act together.”

Immediate family members of covered members (spouses, dependents) must comply with the same independence rules as the covered members. There are various situations in which independence could be impaired as a result of a covered member. For example, financial interest (direct and indirect), family relationship, employment, and consulting relationships (Vermeer, 2021).

Different Audit Engagements


 * 1) The requirements for independence for the different types of audit engagements and if it must be disclosed or not (Audit, Review, Compilation, Preparation, Other attestation engagements)
 * 2) Audit →  auditor independence required
 * 3) Review → auditor independence required
 * 4) Compilation → auditor independence not required, but determination of independence is required
 * 5) Preparation → auditor independence not required, and no need for determination of independence required
 * 6) Other attestation engagements in accordance with Statement on Standards of Attestation Engagements (SSAE) → auditor independence is required

Independence Within Different Audit Firms

Different firms have different independence guidelines, with some being more strict than others. The types of softwares used to detect independence breaches or compliance also differ, with each firm preferring to have their own software. Independence in regards to other attestation engagements

Independence in regards to other attestation engagements