True auditor independence is hard to achieve.
GAGAS independence rules are written by the Government Accountability Office (GAO). And the GAO is in an ideal situation when it comes to auditor independence; they can say whatever needs to be said and not suffer any consequences.
Why? Because they are funded by – and report directly to – Congress; not the federal agencies and programs that they audit.
But most auditors are less secure in their positions and have to think twice before telling the truth, because the truth can cost them their jobs. Internal auditors may suffer the wrath of angry executives and CPA firms could lose annoyed clients.
I’ve often thought that the GAO lacks empathy for other auditors because they have achieved the ideal in auditor independence. I imagine them saying, “We did it! Why can’t you?” But maybe (OK… probably!) that isn’t where they are coming from. Maybe the GAO just takes their role as standard (ideal) setters very seriously.
Are you suffering from one of these conditions?
But the GAO knows that most auditors suffer from one or more conditions that compromise their ability to plainly tell the truth. The GAO calls these conditions ‘threats to independence’. The text italicized below is a direct quote from the 2018 Yellow Book section 3.30:
a. Self-interest threat: The threat that a financial or other interest will inappropriately influence an auditor’s judgment or behavior.
Example: The auditor earns a significant part of their income from the auditee. This affects most internal auditors and many external auditors who rely on only one or a few clients for their livelihood.
b. Self-review threat: The threat that an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of previous judgments made or services provided as part of the nonaudit services when forming a judgment significant to a GAGAS engagement.
Example: The auditor both creates and then audits the financial statements for a small not-for-profit or government.
c. Bias threat: The threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective.
Example: The auditor believes that abortion is wrong yet is assigned to audit a family planning clinic.
d. Familiarity threat: The threat that aspects of a relationship with management or personnel of an audited entity, such as a close or long relationship, or that of an immediate or close family member, will lead an auditor to take a position that is not objective.
Example: The auditor lives in a small town and golfs every week with his audit clientele.
e. Undue influence threat: The threat that influences or pressures from sources external to the audit organization will affect an auditor’s ability to make objective judgments.
Example: An internal auditor allows the executive director to choose what, where, and when they audit.
f. Management participation threat: The threat that results from an auditor’s taking on the role of management or otherwise performing management functions on behalf of the audited entity, which will lead an auditor to take a position that is not objective.
Example: The auditee is dependent on the auditor for advice and guidance and often acts on the auditor’s advice without analyzing the worth of the advice first.
g. Structural threat: The threat that an audit organization’s placement within a government entity, in combination with the structure of the government entity being audited, will affect the audit organization’s ability to perform work and report results objectively.
Example: The auditor is not shielded from harm by reporting directly to those in charge of governance, but instead the auditor reports to the auditees, who naturally want to squelch the auditor’s negative results.
Now that we identified your GAGAS independence condition…
Did you feel pegged by one or more things on that list? Join the club.
How do I know that something on that list pegged you? Because every auditor I have ever worked with suffers from one of those conditions identified in the GAGAS independence standards. It is just a matter of degrees.
Some auditors are rendered almost completely useless by these threats and others are only mildly impaired. Some of the conditions are created by the auditor and some are built into the job.
But, as any 12-step program will tell you, recognizing that you have a problem and then deciding to take action is 80% of the cure. So, if auditor independence is important to you and you want to take action to safeguard it, you’ve done the majority of the work necessary to meet the ideal.
The GAO has some ideas
GAGAS independence standards have a few ideas to help us preserve our independence even while suffering some of these threats. Some of the GAO’s ideas are easy to implement and some are more radical. I’ll talk to you about those ideas in next week’s blog…