Auditor Independence

1
Auditor Independence

• Co. Investor
• hires reports
• Auditor

2
Whos Most Ethical?(1988 Survey)

• Accountants
• Dentists
• ----
• ----
• Politicians
• T.V. Evangelists
• Used Car Salesmen

3
Discussion Time

• Time pressure
• Leigh Ann Walker

4

• Principles Ideal standards
• Not enforceable
• Rules of Specific rules of
• Conduct minimum conduct
• Enforceable
• Interpretations Interpret rules
• Not enforceable, but justify departure
• Ethical Rulings Published explanations
• Not enforceable, but justify departure

5

• Principles Ideal standards
• Not enforceable
• Rules of Specific rules of
• Conduct minimum conduct
• Enforceable
• Interpretations Interpret rules
• Not enforceable, but justify departure
• Ethical Rulings Published explanations
• Not enforceable, but justify departure

6
Independence

• Auditors need to be independent in fact and
  appearance
• Whether consulting actually affected independence
  in fact, it did affect the appearance of
  independence

7
Changes in Independence Rules

• SEC issued revised rules in Fall 2000
• Some limits placed on consulting, outsourcing
  internal auditing
• Consulting fees must be disclosed
• Sarbanes-Oxley added some additional restrictions
• AICPA revised rules similar to SEC and take
  engagement team approach rather than firm-wide
  approach to financial interests

8
Covered Members

• Rules on financial interests apply to individuals
  or partners
• On engagement
• In position to influence the engagement
• Providing non-attest services to the client
• Partners in office of partner responsible for the
  engagement

9
Financial Interests

• Covered
• Members Others
• Direct Interest Not Allowed Allowed
• Indirect Allowed if Allowed
• Interest immaterial

10

• 1. Materiality would be least important to an
  auditor when considering the
• 1. Adequacy of disclosure of a clients
• illegal act.
• 2. Discovery of a weakness in the clients
• internal control structure.
• 3. Effects of a direct financial interest in
• the client on a CPAs independence.
• 4. Decision whether to use positive or
• negative confirmation of accounts
• receivable.

11
Sarbanes-Oxley Provisions

• SEC principles governing services
• Auditor cannot function as management
• Auditor cannot audit own work
• Auditor cannot serve as an advocate for the client

12
Prohibited Non-audit Services (for public
companies)
The Act prohibits the following services, most of
which were previously prohibited by the SECs
rule on auditor independence

• Bookkeeping or other services related to the
  accounting records or financial statements
• Financial information systems design and
  implementation
• Appraisal or valuation services, fairness
  opinions, or contribution-in-kind reports
• Actuarial services
• Internal audit outsourcing services

• Management or human resources functions
• Broker or dealer, investment adviser, or
  investment banking services
• Legal and expert services unrelated to the audit
• Any other service that the Public Company
  Accounting Oversight Board (Board) determines, by
  regulation, is impermissible
• See Problem 4-20

13
Disclosure of confidential Information

• Subpoena or summons
• AICPA peer review
• AICPA ethics division

14
Contingent Fees, Commissions, Advertising

• These activities are generally allowed, due to
  consent agreement with FTC
• Contingent fees and commissions normally not
  allowed for attest clients
• Advertising allowed as long as not false,
  misleading or deceptive

15
Form of Practice

• A relatively new issue is the existence of
  so-called alternative practice structures (ex.,
  firms acquired by American Express, HR Block)
• CPAs must own a majority of the firm and voting
  rights
• CPAs must be responsible for attest functions

16
Problem 4-21

• 101 No Violation (not covered
• member)
• b. 201- Violation (Lack of competence)
• 102 - Violation (No support for
  tax deduction)
• 203 - Violation (Standards not
• followed)

17
Problem 4-21

• e. 101 - Violation (lack of indep.)
• 102 (conflict of interest)
• f. 301- Violation (need permission -
  not AICPA Peer review)
• g. 501 - No Violation (not criminal act)
• h . 101 - No Violation (bookkeeping and other
• services allowed for non-SEC
  clients)