Safeguards to Independence

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;

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.