KPMG Independence Lecture

Why is it important that public accountants, auditors in particular, be independent?

So creators of the financial statements are not heavily altering the financial statements so it appeases users in some way

Auditor Independence

independence of the external auditor. Includes integrity, objectivity, and professional skepticism.

General Standards of Independence

All professionals must consider if a service causes the firm to violate the general standard for independence

Audit Client

An entity whose financial statements are being audited, reviewed, and attested. Includes the affiliates and officers, directors, and substantial shareholders

Who Sets the Independence Rules

• SEC

• PCAOB

• AICPA

• Government Accountability Office (GAO)

• IESBA, previously known as IFAC

• Others: National Association of Insurance Commissioners, Department of Labor, Federal Deposit Insurance Corporation, State board of accountancy

How do rules apply to individuals

Rules cover anyone who are:

• a member of the audit engagement team

• those in a “chain of command”

• any other managerial employee who provides 10 hours of non-audit services to client

• partners in office that “lead audit engagement partner”

• immediate family of covered person

Covered Person Concept Applies

A direct or indirect financial interests, Loans, Benefit plans of immediate family, Savings/checking accounts, Broker-dealer accounts, Insurance products, Credit card balance, Section 529 plans

How the rules apply to accounting firms

restriction on fees, business relationships, partner compensation, communicating and reporting requirements, partner rotations, restriction on non-audit services

Impact on Services

Accounting firms have restrictions on services they can provide to clients, they are not allowed to do certain management functions like:

• making decisions

• negotiating contracts

• preparing documents

• managing staff

SEC Prohibited Services, Unless Reasonable to Conclude

• Bookkeeping and other services related to the accounting records or financial statements

• Financial information systems design or implementation services

• Appraisals or valuations

• Actuarial services

• Internal audit outsourcing

SEC Prohibited Services Overview, absolute

• Human resource services

• Management functions

• Broker-dealer services

• Legal services

• Expert services unrelated to the audit

What does “Reasonable to Conclude” mean

The subject of the services will not be subject to audit procedures during an audit of the client’s financial statements.

applies only when:

1. The entity is not audited where non-audit services are provided

2. results of the non-aufit services will not be subject to audit procedures during an audit

3. services do not violate the general standard of independence or include impermissible servicse

SEC Overarching Principles

1. We cannot perform management or employee functions for an audit client

2. We cannot perform a service which places us in the position of auditing our own work

3. We cannot be an advocate for an audit client

4. We cannot have a mutuality of interest with an audit client

Impact on Audit Clients

• financial statements audited by a non-independent CPA firm will not be accepted by the SEC

• client is not in compliance with filing requirements

• client is not able to access capital markets

• prolong delays in satisfying requirement to provide audited financial statements can result in suspension of client stock

• curing violation is hard, may require demonstration that violation was very minor