David Devlin

1
Auditor Independence in a Global Market Place

• David Devlin
• 23 April 2002

2
Outline

• Independence in Context
• Objectivity and independence in appearance
• Principles Rules v. Rules only
• Consultancy and advice - the public interest
• Safeguards - quality assurance and audit
  committees
• Should independence codes be the same for all?

3
Independence in Context

• The objective High quality financial
  reporting and audit standards, consistently
  applied
• Auditor Independence Only one element often
  too readily identified as the cause of
  audit failure

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Some Elements of Good Financial Reporting 1

• Internal Company Arrangements
• Effective accounting function
• Good accounting records
• Sound internal controls
• Suitable accounting policies
• Adequate disclosure
• Compliance with law and standards
• Internal audit
• Informed review by directors
• Careful approval of the board and shareholders

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Some Elements of GoodFinancial Reporting 2

• External Audit
• Independent and objective auditors
• Compliance with auditing standards
• Quality assurance system
• Audit report
• Enforcement
• Will apply to large companies
• Will probably apply over time to smaller
  companies

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Objectivity and Independence in Appearance

• Objectivity - Independence - Integrity
• Independence in Appearance - Does not actually
  affect objectivity of the auditor - Matters
  to users of financial statements
• The audit partners independence

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Principles Rules versus Rules Only

• The importance of principles based independence
  codes
• Why principles based codes are better
• Why principle based standards for auditor
  objectivity and independence are best

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Why Principle-based Standards are Best for Audit
Independence

• Are the most demanding standards prohibit
  auditors from providing services which compromise
  their independence
• Reinforce the importance of independence as a
  constant imperative for individual auditors
• Require auditors to discuss their independence
  regularly with their client
• Generally contain guidance, restrictions and
  specific prohibitions in relation to particular
  circumstances
• Offer the best opportunity for global and
  European consistency

9
Consultancy and Advice the Public Interest 1

• INDEPENDENCE ARRANGEMENTS SHOULD
• Support the skills base and integrity of the
  audit team
• Permit other mandates required or expected
• At a minimum facilitate assurance to third
  parties
• Regulators
• Other public authorities
• Investors and others

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Consultancy and Advice the Public Interest 2

• Not prevent auditors from giving good advice
• Internal controls
• Assistance with financial reporting challenges
• Financial instruments disclosures
• IAS by 2005
• Enable auditors to develop reporting on new
  areas
• Business risks
• Environmental issues
• Non-financial measures
• Internet information

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Consultancy and Advice- the Public Interest 3

• Irish fee disclosures proposed
• Statutory Audit Services
• Auditrelated Services (e.g. assurance related
  work)
• Non-audit Services
• Audit Committee to confirm audit independence

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Consultancy and Advice- the Public Interest 4

• Does it make sense, in the public interest, to
  prohibit non-audit services in any general way?
• The principles-based framework approach does
  prohibit auditors from providing services which
  would compromise their independence
• This approach is preferred to date in
• The draft EU Recommendation
• IFAC Code
• Several EU countries, including Ireland and
  Sweden, for example

13
Safeguards Quality Assurance

• Ethics and independence compliance needs to be
  subject to quality assurance
• In Ireland, quality assurance is carried out by
  professional full time staff employed by the
  Institute of Chartered Accountants
• Compared to peer review, this is not necessarily
  better, but may appear so
• Increasing interest in public oversight of the
  profession

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Safeguards Audit Committees

• Audit committees are a most helpful safeguard for
  auditor independence
• The EU is currently reviewing corporate
  governance and may examine the role of audit
  committees
• FEE is currently establishing a working party on
  corporate governance, with a focus on relations
  with auditors and on financial reporting

15
Should Independence Codes be theSame for All?

• Yes, because the requirement for objectivity is
  the same and the same principles apply
• How the principles apply may differ it is
  likely to be less complex in terms of specific
  procedures in a smaller audit firm
• The threats to the appearance of independence may
  well be less with a smaller audit client

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Outline

• Independence in Context
• Objectivity and independence in appearance
• Principles Rules v. Rules only
• Consultancy and advice - the public interest
• Safeguards - quality assurance and audit
  committees
• Should independence codes be the same for all?

17
Auditor Independence in a Global Market Place

• David Devlin
• 23 April 2002