Auditor Independence

One of the more challenging aspects of being an auditor is having to turn down potential work.  It is not so much the money we could be paid for that other work, although that is nice in most cases; it is the recognition that our experience and problem-solving ability is valued and desired.  But, if auditors take their ethical responsibilities seriously they should not take additional projects on for their audit clients.

Doug and I discuss this frequently.  For instance, we have intentionally chosen to not prepare tax returns for individuals and businesses and we will only do the most basic 1120-H or 1120 for property associations.  Why?  It is the concern that a reader could question if the tax preparation work would cause us to subordinate our judgement as the auditor.

I know, you are saying, “It’s only a tax return.” And you are right.  But think about it: Let’s say an auditor prepares the tax return for a board member and his small business.  Then the auditor is asked to audit the small business.  The auditor discovers that $100,000 of scrap metal sales was not reported as income by the business.  Or the owner.  And the auditor is also auditing the condo association where the small business owner is also the chair of the board.  And it just so happens the auditor discovers that the association has a contract with the chair’s company to install new piping.  Are you still certain it is only a tax return?

But it can become even more challenging for an auditor if it looks like the fees they charge for that “other service” to the client appears more lucrative than the audit.  First, lets say that you charge $20,000 to a client for an audit.  At the same time the board approves the audit, management dangles a $50,000 consulting fee.  Is this a potential independence problem?

Unfortunately for the profession, many practitioners say “No” or worse, “Not necessarily”.  But think about it.  You are reading the financial statement the auditor attested to and which said there were no problems.  You then find out one of the issues above exists.  Would you, as the reader and who is relying upon that financial statement, be concerned that either of these situations could cause the auditor to issue an inappropriate report?

You see, I can unequivocally state that our opinion is not for sale.  But that is an assertion which is challenging to believe when I receive payments for services that are not audit related.  And I don’t think it matters if it is the board which offers the consulting work or management.  Our engagement is to audit the financial statements prepared by management and to which the board signs off on.  The board engages the auditor on behalf of the owners – but the board still might have its own agenda.  Thus, It is the risk that a reader could believe that our independence – from management AND board – could be impaired that matters.  Accepting money for additional services to an audit client should inevitably lead to the concern that the auditor’s independence is impaired.

Now, I understand that some professionals would say that this is an extreme position.  That is their right.  But I believe that the profession accepting the concept that non-audit fees do not impair independence is one of the primary reasons the auditor and the audit opinion are not held in high regard.

If you want to offer audit or review services to a client, then I think you have to accept that this is all the work you can do for that client.  At C.O.R.E., we believe that an auditor must maintain independence in both action and appearance.  It sucks sometimes.  We have turned down consulting arrangements because we audited the prior year financial statement.  We have turned down audit engagements because we proposed a consulting arrangement in the prior year.

It is our responsibility to do so.



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