Safeguards to independence: a few scenarios

In a recent blog post, we discussed threats to auditor independence and how the majority of auditors struggle with one or more of these threats.

But what is an auditor to do to address those threats?

The GAO suggests that you apply a ‘safeguard.’ A safeguard to independence is similar to a control in that it mitigates the risk of something bad happening.

What is the bad thing that could happen? The auditor’s work is rendered useless because the user of the audit questions the auditor’s objectivity.

The GAO has along list of ‘safeguards’ to auditor independence starting in section 3.50 and stretching to 3.56 in the 2018 Yellow Book. Some of the safeguards will work if you are having problems with the independence of an individual auditor and others will work if your entire audit shop has an independence issue.

Let’s run through two independence scenarios – one personal and one organizational – to see what advice the GAO has for us.

Safeguards to independence for an individual on your team

Consider this scenario:

Marci, your favorite audit supervisor is newly wed and has been complaining here and there about the long hours and travel involved in her job. She misses her husband. One of the audit clients overheard Marci kvetching one day, and offered her a job on the spot, promising her no travel and to meet or beat her current pay! 

Now what are you going to do? Let’s say that Marci decides to stay with you because she sees a better career future with your audit organization. Assuming that you believe that the job offer does impair Marci’s independence regarding this audit client, the GAO has the following safeguard ideas for you:

1. have another auditor re-perform part or all of Marci’s work on the engagement
2. have an auditor who was not part of the engagement team review Marci’s work
3. remove Marci from the engagement

You can implement a hybrid of those ideas, too. For instance, you could remove Marci from the engagement and re-perform the work she has completed so far.

Safeguards to independence for your entire organization

The GAO has another list of safeguards to independence when a whole audit organization’s independence is threatened. Consider this scenario:

The county auditor is really the chief financial officer for the county. The county auditor oversees the finance division, the human resource division and the internal audit division. Currently, the internal audit division reports directly to the county auditor.

Assuming that you agree this is not ideal, the internal audit division could ask county policies be changed to:

1. Allow the internal audit division to report to the county commissioners instead of the county auditor
2. Allow the internal audit division to have direct access to the county commissioners and ensure that the internal audit division meets with the county commissioners regularly
3. Grant the internal audit division sole authority over the selection, retention, advancement, and dismissal of its personnel
4. Prevent the county auditor from interfering with audit reporting, including the findings and conclusions or the manner, means, or timing of internal audit’s reports

Again, the solution to this independence dilemma may include one or all of those ideas.

But you know best

Or should I say your gut knows best? If your independence is compromised, you know it and you also know what you have the power to do about it. In some cases, a simple tweak to your reporting structure could make a big difference to your actual and perceived independence and credibility. In other cases, you might have to get an entirely different job to maintain your professional reputation.

If you want to reason through your independence dilemma with someone, shoot me an email and we can set up a time to talk.