The Importance of Independence

Yesterday, Doug and I discussed taking on a new client.  It is not an HOA or condo but a for-profit business.  Yes, even though we focus primarily on HOA audits and condominiums, we do the for-profit financial statement attest as well.  It is with for-profit businesses that our focus on remaining independent really helps.

With HOA’s and condo audits, the boards typically change every few years so we are pretty confident that we can remain independent.  The one class of client we will never do any work for is community management companies – as we firmly believe that this would impair our independence.  We are, after all, passing judgement on their work as it relates to their associations and we believe nothing impairs independence better than taking money from the watchdog.

The biggest independence issue with for-profit companies is that we typically do work for both the owner/shareholders and then perform the attest service on the business.  In most cases, this isn’t a big problem but occasionally, like the engagement we are evaluating now, the two may end up at odds.

Obviously this client does not want a review of its financial statements for its own benefit – although I think it is smart for every business to prepare financial statements and have them reviewed by an independent CPA.  In this case, they have bank covenants that require a reviewed financial statement.  And our independence issue is that we both have social contact with several of the shareholders and actually enjoy their friendship – which, by the way, is what provided us the opportunity to propose our review service.

The ethics rules don’t prohibit a CPA from being friendly with shareholders and management – I mean, lets face it, accountant’s are not the most likeable people on the planet so to deny us the few close friends we MAY be able to conjure would be cruel.  But we look at the independence issue a little deeper.  Is a friendship more important than our objectivity?

It is easy to say that “No, I would never let my friendship get in the way of doing my job!”  But when push comes to shove, are you willing to speak objectively about your friend’s job performance?  Do you have such a strong enough moral compass that you can deal with the glares and whispers from people you both know who have heard one side of the story, because yours has to remain silent?

Perhaps an example will help.

Last year we were performing a review engagement and during the engagement found that the controller had taken an incorrect stance on a certain transaction.  Her stance led to the understatement of liabilities by about $5.0 Million.  with that additional debt recorded, the company would have blown through their loan covenants and probably been put in special assets.

We called the controller on it.  She fought back and said that we could issue our report with an “Except for” paragraph if we wanted but she was not willing to book the liability.  Our friendship, a very strong personal relationship was on the line and all we had to do was go along with the non-recording of the transaction and issue a modified review report.

Doug and I discussed it and agreed that the most appropriate response was to inform the board of the controllers decision, our understanding of the transaction and that we were not willing to allow the financial statements to be issued without the liability being booked.

This is one of the reasons, by the way, that I took the chance to start C.O.R.E. Services with Doug.  He agreed that, if push came to shove, it was far better to be fired by a client for keeping our integrity than cave in – because once we cave we can never regain our original position.

So yes, when you select your CPA for attest services, those pesky audits and reviews, pick one who is willing to stand up for what is right – and not just because the rules say so – but because in the end you want someone of the highest moral principal you can find standing behind your financial statements.

Have a great weekend.  And as always, if you are looking for a CPA to perform an audit or review, check our website and schedule a conversation with us.  I think you will be glad you did.

 

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