Auditor Independence : Update on Ethics
Author:
Heather Briers
The last few years have seen significant debate on the topic of auditor independence and in particular on the provision of non audit services to audit clients. Recently, we have seen several revisions to the ethical pronouncements with which members and member firms of the Institute of Chartered Accountants in Ireland (ICAI) must comply.
Accountants in practice, particularly those auditing small entities will no doubt have noted the development of Ethical Standards by the Auditing Practices Board (APB) and will be aware of the submissions made by ICAI on these new standards.
After a considerable period of consultation, and having taken on board comments made about the significant problems that would be faced by small entities, the APB has made a number of amendments to the standards and has now finalised standards ES1 to ES5 together with the Provisions Available for Small Entities (PASE). The Ethical Standards and PASE apply to audits of financial statements commencing on or after the 15 December 2004.
ICAI Ethical Guide for Members
The Ethical Standards produced by the APB are not stand alone documents. Rather, they must be applied by ICAI members and member firms in conjunction with all other Statements in the ICAI's Ethical Guide for Members, and in particular, Statement 1.
Statement 1, 'Integrity, Objective & Independence' (1 January 1998) as supplemented by the Auditor Independence: Guidance on Best Practice (1 May 2003) will be replaced by revised Statement 1, 'Independence for Assurance Engagements', which is available on the ICAI website and on Chariot.
Revised Statement 1 applies to all non audit assurance engagements relating to periods commencing on or after 1 April 2005 and for audit engagements relating to periods commencing on or after 15 December 2004.
Engagements falling within the scope of provisions of Statement 1(1 January 1998) should continue to comply with the requirements of that Statement and, if relevant, the provisions of the additional guidance on Auditor Independence (1 May 2003).
Objectivity, Independence - the Framework Approach
The 'Introduction and Fundamental Principles' of ICAI's Ethical Guide provides a framework for ethical decision making.
On safeguarding objectivity Paragraph 2.2 states 'in deciding whether to accept (or continue) an engagement or appointment members and member firms should consider whether their objectivity is, or can be, adequately safeguarded in relation thereto’. The matters to be considered include:
- Expectations of those directly affected (and entitled to be affected) by the work.
- The public interest.
- Existing and potential threats to objectivity.
- Safeguards which are in place or can be put in place, overt or otherwise, to protect against threats.'
This remains unchanged.
The current Ethical Guide and in particular Statement 1 (current and revised), and Auditor Independence: Guidance on Best Practice, have identified a number of areas where the threat to objectivity and independence is so great that no appropriate safeguard can be identified, hence the engagement should be declined, or the member or firm should resign from the engagement. These particular areas are stated in terms of prohibitions.
The following are the key steps in the decision making process.
- Identify the threats to independence;
- Evaluate the significance of each threat identified;
- Determine if there are any prohibitions that preclude performing the engagement;
- For each threat identified which is not clearly insignificant, document the threat and a description of the safeguard applied and an explanation as to how it eliminates or reduces the threat to an acceptable level. This will include recording a decision not to perform the function.
Impact on the audit of small entities
APB Ethical Standards 1 to 5 (ES1 - ES5) apply to all companies. There are a number of additional provisions (and prohibitions) relevant only for listed companies.
PASE allows a number of alternative approaches and exemptions for small entities. Small entities are defined as entities with a turnover less than the statutory auditor exemption limit as approved by the EU (€7.3 million or Stg£5.6 million).
In the transitional period there will be considerable scope for confusion. To assist members, ICAI is providing a number of support services including a dedicated area on the website (www.icai.ie), a dedicated ethics enquiry service, guidance material including a roadmap on compliance, and CPD courses in May and June.
Accompanying tables have been omitted from the online version of this article.