To wrap up our blog series on threats to auditor independence, let’s talk about the cure. Or, as the GAO calls them, “safeguards to independence.”
The burn option
The ultimate way to cure an independence problem is to refuse to do the audit. Just burn that bridge and walk away, and that will take care of an independence threat for sure. You won’t have any connection or bridge to the subject matter and auditee at all!
Less dramatic options
Do you have to take it to that extreme? No. The GAO gives you other gentler options. Although, I must say, the first one on their list of cures is almost too gentle.
a. consulting an independent third party, such as a professional organization, a professional regulatory body, or another auditor to discuss engagement issues or assess issues that are highly technical or that require significant judgment;
b. involving another audit organization to perform or re-perform part of the engagement;
c. having an auditor who was not a member of the engagement team review the work performed; and
d. removing an auditor from an engagement team when that auditor’s financial or other interests or relationships pose a threat to independence.
Among the safeguards to independence, asking another auditor or expert for their assessment on your independence problem (option a) is the least dramatic approach. Hopefully, this auditor or expert agrees the threat isn’t too serious and you can proceed the audit as planned.
A few folks have called me over the years seeking my opinion and have not liked my answers. I tend to be a little strict when it comes to auditor independence… if you haven’t noticed already. 🙂
I vividly remember this call
Here is one conversation about independence that I remember vividly: A partner with a small CPA firm called me to ask if it was OK for his daughter to become an assistant controller in the accounting department for his most significant audit client.
Since the CPA firm was conducting a financial audit of the client and the daughter’s job would entail her working on the financial statements, he imagined a future, significant threat to his independence.
He hoped I’d say his firm could proceed with the audit if he avoided working directly with his daughter. However, to his chagrin, I did not agree with his plan. After reasoning through the options listed above for safeguarding his independence, I told him he either needed to drop the audit or his daughter should get a job elsewhere.
In this case, option b (having another audit organization perform or reperform the piece of the audit that the daughter was involved in) would be nearly impossible since her job as assistant controller was pretty comprehensive. The breadth of her duties would make it difficult for him to parse out and avoid auditing any subject matter that she touched.
He could have another auditor review the audit work (option c), but since it was a small firm, there weren’t many auditors left that weren’t already assigned to the project.
Or he could remove himself from the audit (option d). That would work if he wasn’t the only audit partner, but he was. 🙁
At the end of our call, he circled back to option a and told me he would call a few more people and the AICPA for their opinions. He wanted his cake (a well-employed daughter) and to eat it, too (conduct the audit). He would continue making phone calls until someone saw it his way. I’m sure it’s no surprise to you that I haven’t heard from him since.
This list isn’t exhaustive
The GAO titles the above list of cures as ‘examples’ of safeguards to independence. It isn’t exhaustive and you may come up with another cure. Perhaps you should layer on a few cures if one won’t adequately address the threat. Here is what the Yellow Book says:
GAGAS 2021 3.51 The lists of safeguards in 3.50 and 3.69 cannot provide safeguards for all circumstances. They may, however, provide a starting point for auditors who have identified threats to independence and are considering what safeguards could eliminate those threats or reduce them to an acceptable level. In some cases, multiple safeguards may be necessary to address a threat.
Avoid calling me about independence issues
If you’re looking for someone to tell you that you can have your cake and eat it, too, please don’t call me. I won’t tell you what you want to hear. Let’s talk about something else – anything else – except that.
Want to learn more about this topic?
Check out this series of blogs on seven threats to auditor independence:
- The self-interest threat
- The self-review threat
- The bias threat
- The familiarity threat
- The undue influence threat
- The management participation threat
- The structural threat
You can learn more about threats to independence in a bundle of self-study courses custom designed for your brand of auditing. Financial auditors will enjoy this bundle and performance auditors will enjoy this bundle. Or check out our best selling self-study, the Yellow Book Interpreted.