Respecting Auditor Independence
Auditor independence is still a big buzz phrase and essentially the cornerstone of the auditing profession since the Sarbanes-Oxley Act was enacted in 2002. An independent audit is meant to provide an objective opinion on public company financial statements, although the rules are similar for auditors of private companies. To help our clients, prospects and others understand the independence guidance from the Securities and Exchange Commission (SEC), JLK Rosenberger has provided an overview below.
Independence guidelines
External auditors are supposed to be “independent” of their audit clients — both in appearance and in fact. This may seem like common sense. But there’s sometimes confusion about the rule, causing the SEC to file auditor independence cases on a regular basis. These enforcement actions generally fall into three broad categories:
- Auditors who provide prohibited non-audit services to audit clients
- Auditors who enter into prohibited employment (or employment-like) arrangements with audit clients
- Auditors (or associated entities) with prohibited financial ties to audit clients (or their affiliates)
To avoid independence-related enforcement actions, it’s important for auditors and their clients to respect the auditor independence guidance. Audit clients generally include companies whose financial statements are being audited, reviewed or otherwise attested — and any affiliates of those companies.
Four questions
If you’re unsure whether an assignment violates the auditor independence guidance, consider these questions:
- Does it create a mutual or conflicting interest?
- Does it put the auditor in a position of auditing his or her own work?
- Does it result in the auditor acting as a member of management or an employee of its audit client?
- Does it put the auditor in a position of being the client’s advocate?
Affirmative answers may indicate possible independence issues. The SEC applies these factors on a fact-sensitive, case-by-case basis. Examples of prohibited non-audit services for public audit clients include bookkeeping, financial information systems design, valuation services, management functions, legal services and expert services unrelated to the audit.
The auditor independence guidance applies to audit firms, covered people in those firms and their immediate family members. The concept of “covered people” extends beyond audit team members. It may include individuals in the firm’s chain of command who might affect the audit process, as well as other current and former partners and managers.
Independence is universal
The professional auditors at JLK Rosenberger are committed to maintaining independence so that we can provide accurate and reliable financial statements stakeholders can rely on. Our CPAs strive to be public watchdogs, protecting the interests of public company investors as well as private company shareholders and financial institutions that lend money to companies of all sizes. If you have questions or concerns about auditor independence or if you need an independent auditor, please call us at 972-931-6803 or click here to contact us. We look forward to hearing from you soon.
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