I guess I stepped in it today.
On my other blog for CORE, I wrote today about independence, you know that little section of rules which constrain the CPA from essentially reporting on their own work.
- Yes, I know that it is done;
- Yes, I know it is done all the time;
- Yes, it is a literal interpretation;
- No, I don’t think you should try and paper it over.
Two reports require the CPA to be independent of the client and management: Audit and Review. No one is forcing the CPA firm to perform an audit or a review. If you want to be part of management, I say GO FOR IT! Help management get their act together. Help them adjust their books and, more importantly, know when they need to debit this and credit that. Help them, but don’t come back and then claim your independence isn’t impaired.
Impairment of independence isn’t just a factual matter. Yes, you can create lots of paper which says that Ms. Whatshername, the a/p clerk, understands what you are doing on her behalf and she is ok with you making that journal entry for her. But when you are brought in to re-enter the entire accounts payable because Ms. Whatshername didn’t enter anything and the controller was fired so there is no one to check your work… don’t push your luck.
The appearance of impairment is even more important for those reviews and audits. You are dealing with the integrity of the profession when you ignore what some other person might think about your independence, or lack of it. If it looks to an innocent person that you are doing the work of management, well, guess what? You are.
To paraphrase a letter which went from an association to the owners of a condominium:
- Management way back when got it wrong
- New management starting in 20XX got it even more wrong
- New management denied their work was wrong consistently from then until now
- New management denied it was wrong even after being beat over the head with it
- Board hired independent CPA to redo management’s work
- Independent CPA recalculated the numbers, resulting in a major change
- The CPA says their work is correct
- And, you can rely upon the CPA for this because they are trustworthy
Sorry, but that wonderful letter praising the CPA now means the CPA probably is no longer independent as to the financial statement audit.
Their work was awesome. Totally correct. Nailed it to within $0.02 for every owner. Told the attorney and the board they were right and said so in a letter to the owners. they were worth every dime they were paid to fix the mess.
But their independence is now impaired. There is no one, not management, not the board, definitely not the attorney, who is going to take responsibility for the CPA’s work. The CPA owns it. They said so. Under the rules, both of the AICPA and common sense, they are no longer independent of the client.
No independence no audit.
I get it, it is my interpretation. Well… Not really. It is 20 odd years of practicing in this area and reading hundreds of ethics interpretations. It is having to struggle with deciding when we cross a line and are no longer looked at by Tommy Banker or Amanda Bonding Agent as separate from management. When the question is, “Are you getting paid to help management or to report on them?”; it does become a little more clear.
Attest firms MUST err on the side of caution. The big 4 don’t, the next 8 don’t. Their failures don’t give the rest of us license to slide down that wonderful chute into impairment hell. Take the road less traveled but best for your client. Have integrity to admit your lack of independence when it exists.
Make the right call. Help management or report on them. If you can’t tell the difference, well, you probably shouldn’t be playing this game.