What does it mean when an accountant is not independent?
Here we look into distinguishing the difference between the two ethical concepts of independence and objectivity. Show
Introduction and backgroundThese ethical concepts have always enjoyed an element of interaction. In ICAEW’s 1987 Guide to Professional Ethics (now known as the Code of Ethics) the Statement on Professional Independence described it as a ‘concept fundamental to the accountancy profession’ and ‘an attitude of mind characterised by integrity and an objective approach’. This clearly explains objectivity as being part of independence. In ICAEW’s 1997 Guide to Professional Ethics Statement 1.201 on Integrity, Objectivity and Independence referred to Objectivity as ‘independence of mind’. Other more recent comments on the interaction have included independence being considered as ‘a measure of objectivity’, or to independence ‘enabling’ an objective conclusion. As we can see there is an element of circularity here. Here we set out an analysis of current definitions, provide some practical illustrations of how they currently interact and share ICAEW’s thoughts on independence, drawing attention to ICAEW’s principles-based framework for resolving ethical problems. Current definitions and requirementsIn the current IESBA Code of Ethics 120.1 Objectivity ‘imposes an obligation on all professional accountants not to compromise their professional or business judgement because of bias, conflict of interest or the undue influence of others’. The current IESBA Code of Ethics definition of Independence explains it as being made up of two elements: ‘Independence of mind’ and ‘independence of appearance’. The former is still defined to include integrity, objectivity and scepticism. The latter is defined as being free from ‘facts and circumstances’ that would lead a reasonable and informed third party to conclude that integrity, objectivity or scepticism was compromised. This has been the extant definition for a number of years which perhaps explains why auditor independence is now largely viewed through the lens of compliance, with detailed rules to be followed rather than a more principles based threats and safeguards approach. Indeed, in contrast to what the 1987 document suggests, independence is now something that is only really a relevant consideration for an auditor or assurance provider, with the rest of profession concerned with objectivity. Practical applicationAs indicated above, independence has very much become a matter of regulatory compliance, where a checklist approach such as that illustrated below tends to be adopted to ensure that the auditor is free from (or at least manages) a prescribed list of circumstances under which independence is perceived to be compromised. The approach to auditor independence has increasingly become rules based rather than principles based. Objectivity, on the other hand, is much more concerned with reasons and motivations behind certain decisions or behaviour. It is concerned with internal thought processes rather than lists of prohibitions. As such a framework such as the ICAEW framework for resolving ethical problems is more suitable for assessing objectivity than a checklist. If we take the IESBA definition of independence, and regard objectivity and ‘independence of mind’ to be closely aligned (as was explicitly stated in early Guides to Professional Ethics) it stands to reason that both of the tools above are necessary to fully assess auditor independence. Example of auditor independence checklist approach
(this is an example of an approach that has been adopted by some. It is not intended to be an exhaustive independence checklist and should not be treated as such).
Example scenariosThe scenarios below illustrate the distinction (and interaction) between the concepts of independence and objectivity as defined by the IESBA Code of Ethics.
Country comparisonsAuditor independence is, however, often an issue that finds its way into domestic legislation, and some countries take a slightly different (in some cases entirely rules based) approach. The different approach taken by countries to independence is illustrated in the following examples. The UK FRC Ethical Standard defines independence as ‘freedom from conditions and relationships which, in the context of an engagement, would compromise the integrity or objectivity of the firm or covered persons’ (paragraph I23). It is described as underpinning objectivity but sufficiently distinct from it being concerned with the circumstances surrounding the relationship rather than the auditor’s state of mind. This approach to independence is therefore very much more concerned with ‘independence of appearance’ rather than ‘independence of mind’, with a number of detailed regulatory requirements designed to ensure the former. In Japan, independence requirements derive from the Japanese Institute of Certified Public Accountants (JICPA) Code and statute. They lay out detailed rules concerning financial interests, personal interests, scope of non-audit services and rotation of audit partners. The JICPA supplements this with some self-regulatory provisions however overall compliance is assessed by reference to a rules based approach. The Swedish Auditors Act requires auditors to be independent, but the approach is very different and is much more principles based. The Act requires auditors to carry out a threats and safeguards analysis such that sufficient measures are taken to ensure that independence would not be questioned. There are five absolute prohibitions, far fewer than in the regulations of many other countries. The approach to auditor independence is therefore largely achieved through a principles based framework. ICAEW’s viewICAEW advocates a framework approach to independence that:
In short, we believe that this represents a more rigorous means of ensuring auditor independence. The most effective way to ensure the reality of independence is to provide guidance centered around a framework of principles rather than a detailed set of rules that can be complied with to the letter but circumvented in substance. Absolute requirements and prohibitions only have a place where no acceptable safeguard could reasonably be applied. For example, a blanket prohibition on the provision of non-audit services to audit clients can be inefficient for the client and is neither necessary to ensure independence, nor helpful in contributing to the knowledge necessary to ensure the quality of the audit.
What does independence mean for accountants?Independence generally implies one's ability to act with integrity and exercise objectivity and professional skepticism. The AICPA and other rulemaking bodies have developed rules that establish and interpret independence requirements for the accounting profession.
Do accountants need to be independent?Fact or appearance—both are indispensable. ule 101 of the AICPA Code of Professional Conduct has long required CPAs who perform any attest services to be independent of their clients. Recently the SEC has also issued new rules applicable to SEC registrants.
Why is independence important for accountants?Ensuring auditor independence is as important as ensuring that revenues and expenses are properly reported and classified. If the auditor's independence is impaired then the company has not satisfied the requirement to file financial statements audited by an independent accountant.
What happens if an auditor is not independent?Auditors are expected to provide an unbiased and professional opinion on the work that they audit. An auditor who lacks independence virtually renders their accompanying auditor report useless to those who rely on them.
|