AC312 AUDITING

1. AC312 AUDITING Lecture 8INDEPENDENCE

2. Learning Outcomes • What is independence • Why independence is important • Threats to independence • Rules to support independence • Structural reforms • Consequences if auditors not independent Lecture 8 Independence

3. Elements of independence • objectivity • unbiased • uninfluenced by others • a state of mind • practitioner independence • profession independence Lecture 8 Independence

4. Importance of Independence • Fundamental to assurance function • No credibility without independence • Derived from agency relationship • Basic premise of all auditing • Fundamental ethical principle Lecture 8 Independence

5. ICAEW Guide to Professional Ethics The Fundamental Principles 1. Integrity 2. Objectivity 3. Competence 4. Performance 5. Courtesy Lecture 8 Independence

6. Threats to Independence • Self-interest threat • Self-review threat • Familiarity or trust threat • Intimidation threat • Advocacy threat Lecture 8 Independence

7. Specific areas of risk • Fee dependence • Financial and business relationships • Family relationships • Partner joins client • Provision of other services Lecture 8 Independence

8. Professional safeguards • Professional training • Ethical code • Peer pressure • Internal quality control within audit firms • Involvement of audit committees and non-executive directors Lecture 8 Independence

9. Rules to make independence visible • Prohibit closely connected relationships • Set limits to fees from one client • Prohibit loans from clients • Guidelines for receiving hospitality • Guidelines for senior staff taking employment with client Lecture 8 Independence

10. Structural reforms • Prohibit non-audit services • Ban provision of internal audit services • Compulsory rotation of auditors • Independent agency for hiring and paying auditors • State auditing board • Hewitt enquiry Lecture 8 Independence

11. Patricia Hewitt 27-2-02 Auditors All of us here this evening, I have no doubt, were appalled by the collapse of Enron. As a British prime minister once said of the Lonrho affair, "the unpleasant and unacceptable face of capitalism". But as Edward Heath also went on to say, "one should not suggest that the whole of industry consists of practices of this kind" and I couldn't agree more. But the collapse of Enron is of such a scale that it requires us carefully to review our arrangements for financial reporting and auditing. This is why I have set up a group jointly with the Treasury, Financial Services Authority and the Accountancy Foundation to co-ordinate our response to the issues raised by Enron's collapse. While the accounting and regulatory requirements in the US are significantly different to the UK it is crucial that we act to address issues which may question the integrity of markets. I am equally determined that the outcome should be measured, thought through and carefully judged. Lecture 8 Independence

12. What if auditors are not independent? • Does it matter? • Does lack of independence mean loss of objectivity, lack of integrity? • Would capital markets lower prices of securities? • Is independence associated with specific (Western) cultures? Lecture 8 Independence

13. AC312 AUDITING Lecture 8INDEPENDENCE