15 - integrity, objectivity and independence

integrity

being straightforward and honest, not being associated with false information, reckless or obscure

objectivity

not allowing bias, conflict of interest or the undue influence of others to compromise judgement

independence

freedom from situations and relationships that mean a reasonable and informed third party would conclude objectivity is impaired

importance

• people expect auditors to provide objective opinions

• they need to act in the public interest

public interest entities

organisations that have a significant impact on the public due to size, importance or role. have stricter regulations

services banned for public interest entities

• tax services, eg payroll tax, tax advice, calculations

• playing any part in management/decision making

• bookkeeping

• payroll services

• designing and implementing internal control or risk management procedures

• valuations

• legal services

• internal audit function

• financing, capital structure, allocation

• promoting, dealing, underwriting shares

• HR

self interest threats

• employment with client

• partner on client board

• family and personal relationships

• gifts and hospitality

• loans and guarantees

• overdue fees

• percentage or contingent fees

• high percentage of fees

• lowballing

• financial interests

• close business relationships

financial interest

an interest in equity, debt, loan etc

direct financial interest

owned and under their control, or beneficially owned through an intermediary and has control

indirect financial interest

beneficially owned through an intermediary and has no control

people who cannot own a financial interest in a client

• assurance firm and partners in it

• someone in a position to influence the engagement

• immediate family

financial interest safeguards

• disposing of the interest

• removing them from the team

• informing the audit committee

• engagement quality review

close business relationships

• common commercial interest, eg:

• joint ventures

• distribution or marketing arrangements

• but -allowed to purchase goods in the ordinary course of business that are inconsequential

employment with client

• dual employment isn’t allowed

• can affect independence as they may be motivated to impress a possible employer and will have too much knowledge of the systems and procedures

client employment safeguards

• modifying audit strategy and team

• assigning the engagement to someone with the same experience levels

• reviews

• quality management procedurs

• if a partner who was related to the audit in the past 2 years leaves, they need to resign as auditors and cannot reaccept for another 2 years

partner/employee on client’s board

banned

loan staff assignments

banned

family and personal relationships

• need to consider their roles and closeness

• if the family member is a director/officer/employee in a position to exert control over the subject matter, the auditor needs to be removed from the assurance team

• need quality management policies and procedures for disclosure

close family

parent/child/spouse. can be on the audit team but need to consider closeness and responsbilties

immediate family

spouse or dependant. cannot be on the audit team

gifts and hospitality

can only accept if trivial and inconsequential

loans and guarantees

• cannot make to or accept from a client

• unless the client is a bank and it is made on normal business terms in the normal course of business and isn’t material

overdue fees

• payment needed before the following year report can be issued

• need to guard against fees building up and discuss with audit commitee

contingent fees

• fees calculated on a predetermined basis relating to the outcome

• not allowed

high percentage fees safeguards

• discuss with the audit committee

• taking steps to reduce dependency

• obtaining quality reviews

• consulting a third party

ICAEW total fees

public interest entity fees for 2 years exceeding 15% need to be disclosed and reviewed

FRC total fees

• if total fees regularly exceed 10% or 5% if listed then it needs to be disclosed to ethics partner and governance

• cannot act as auditors if greater than 15/10%

• non-audit service fees cannot be more than 70%

exempt non-audit service fees

regulatory or legal reporting

lowballing

quoting a significantly lower fee than the previous firm

lowballing safeguards

• records to show that appropriate staff and time has been spent on the engagement

• complying with all standards, guidelines and quality management procedures

self-review threats

• service with assurance client

• preparing accounting records and financial statements

• valuation services

• tax services

• internal audit services

• corporate finance

• other services

services with a client

people who have been an officer/director/significant employee of the client in the past 2 years shouldn’t be assigned to the assurance team for 2 years

preparing accounting records and financial statements safeguards

• staff members not on the audit team doing the work

• policies and procedures to prevent auditors from making management decisions

• requiring the source data for entries to be originated by the client

• requiring the underlying assumptions to be originated and approved by the client

valuation services

cannot carry out valuation services that have a material effect on a listed company’s FS or involve significant judgement and have a material effect on FS

valuation safeguards

• can give immaterial valuations but need safeguards

• second partner review

• confirming the client understands the valuation and assumptions

• the client acknowledges responsibility for the valuation

• separate personnel for the valuation and audit

taxation services

• can do tax return preparation if management takes responsibility

• cannot do tax calculations for public-interest entities

• tax planning is only allowed when advice is clearly supported by authorities/precedents and effectiveness doesn’t depend on certain treatments or presentation

• can provide assistance in resolution of tax disputes if immaterial and using separate staff

tax safeguards

• services provided by an independent tax partner or senior tax employee

• obtaining external independent advice

• review by partners not on the audit team

FRC tax rules

• cannot promote tax structures or provide advice where there is reasonable doubt over the accounting treatment

• cannot undertake a management role

• cannot prepare tax calculations for a listed entity that are material

• cannot act as an advocate

corporate finance services

• cannot promote, deal or underwrite client shares

• cannot commit a client to the terms of a transaction or consummate a transaction

• can help identify sources of capital and provide structuring advice as long as safeguards are used

• cannot provide financing, capital structure and allocation services to public interest entities unless immaterial

IT services

• allowed where they don’t relate to the accounting system or FS

• banned if they do or involve taking a management role

• cannot operate/maintain/monitor IT systems, store data so their records are incomplete, act as the only access to information systems

advocacy threats

• legal services

• contingent fees

• corporate finance

familiarity threat

• family and personal relationships

• employment with client

• recent service with client

• long association

• recruitment

long associations

• need to monitor relationships between staff and clients

• safeguards used - rotating senior staff, quality reviews

• need to resign if safeguards cannot be used

• if the audit partner has held the role for 10+ years, consideration is needed, rotation, communication to governance

long associations FRC rules

• cannot act as the audit engagement partner for more than 5 years

• cannot subsequently partake in the audit for another 5 years

• may need to be flexible, can continue for another 2 years if substantial changes will be made in the client’s business or there are unexpected changes in senior management

long associations quality reviewer FRC rules

• cannot act as reviewers for more than 7 years

• cannot act as reviewer and partner for more than 7 years

• cannot return to the roles for 5 years

recruitment services

banned, cannot advise on appointments or remuneration packages

intimidation threat

• close business relationships

• family and personal relationships

• audit staff moving to client

• litigation

actual and threatened litigation

• firm risks losing clients, bad publicity, charged with negligence

• may pressure them to produce unqualified audit reports

• depends on the materiality, nature and if the litigation relates to a prior engagement

litigation safeguards

• disclosing the nature and extent to the audit committee

• removing specific affected people from the audit team

• additional professional accountant to review work

management threat

• firm undertakes work involving making judgements and decisions that are the responsibility of management

• if there is informed management, safeguards can reduce the threat

informed management

the member of management receiving the results of non-audit services can make independent judgements and decisions based on the information provided

accepting new clients

• need to consider any ethical issues or threats

• eg illegal activities, dishonesty, questionable accounting practices

• if safeguards cannot reduce the risk, the engagement should be declined

• a commitment from governance to improve may be sufficient

resolving ethical conflicts factors

consider:

• relevant facts

• relevant parties

• ethical issues involved

• fundamental principles

• established internal procedures

• alternative courses of action

resolving ethical conflicts actions

• refer to the relevant department

• better to resolve in-house

• seek further advice from ICAEW