Prior to becoming a CPA, when I heard “independence” I would think of Toby Keith songs, fireworks, and the American flag. Now that I’m an auditor, independence is not only a celebration on July 4th but also an assessment we must make on every attest engagement we perform.
The American Institute of CPAs (AICPA) accurately states objectivity as “a distinguishing feature of the profession”. An engagement team’s independence and lack of bias towards a client gives the users of the financial statements (the Users) confidence that the statements present fairly, in all material respects, the financial position of the entity.
The AICPA’s Code of Conduct (the Code) defines several “threats” that, without proper safeguards in place, could impair the independence of the auditor. In the not-for-profit world, the most applicable threats are familiarity, management participation, and self-review. For example:
- Familiarity: The wife of one of the attest engagement team members is the CFO of the client.
- Management participation: A tax partner of the firm serves as a director of the entity.
- Self-review: The firm’s accounting niche prepares invoices or other source documents and calculations for the attest client.
Would the team member write up his wife on a material weakness if he knew it could affect her bonus (and result on him sleeping on the couch)? Would the partner give an adverse opinion if it reflects poorly on a fellow partner or would an attest engagement team review work of their coworkers and write it up as wrong? Either of those would make the holiday party quite awkward.
There is a plethora of situations that could result in a threat to independence. Our profession is continuing to assess and update standards to mitigate these threats. After all, you’re paying for an unbiased opinion and that’s what you should get.
By Samantha E. Mahlen, CPA