David Devlin 23 April 2002

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”

4. 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

5. 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

6. 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 partner’s independence

7. 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

8. 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

10. 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

11. Consultancy and Advice- the Public Interest [3] Irish fee disclosures proposed: Statutory Audit Services Audit–related Services (e.g. assurance related work) Non-audit Services Audit Committee to confirm audit independence

12. 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

14. 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

16. 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