April 28, 2023

Auditor Independence—It’s Not Just a Checklist

As we’ve noted previously on this blog, auditor independence is an issue that audit committees, in addition to auditors, need to stay on top of since violations of the independence rules can pose a serious risk to the audit client as well. This post from the CPA Journal has a good reminder that auditor independence considerations go beyond the list of specific relationships that render an auditor and the auditor’s firm as not independent—there is also a general standard to consider.

The post provides one case study where the CAO favored—and provided confidential information to—one firm in a bid for audit work, which resulted in the audit committee terminating the CAO’s employment and the audit firm’s engagement once it learned of the conduct. It also cites several other independence violations that involved a failure to comply with the SEC’s general standard rather than any of the specific prohibitions. Here’s an excerpt:

A lead engagement partner developed and maintained a close personal relationship with the CFO of an audit client and the CFO’s family. This relationship included frequent social events, gifts, and overnight out-of-town trips that involved lavish spending. The activities violated the audit firm’s policies, which identified such extensive relationships as creating “independence issues from an appearance perspective.” The SEC sanctioned the partner for his independence violations, and the firm for failing to act on red flags regarding the partner’s relationship with the CFO (AAER 3802, September 19, 2016).

An audit partner had a close personal and romantic relationship with the CAO of an audit client. The SEC sanctioned the audit partner and the CAO for the independence violation as well as the lead engagement partner and the audit firm for failing to act on red flags about the relationship (AAER 3803, September 19, 2016).

An audit firm conducted microcap conferences for several years at which the firm touted a group of companies that included audit clients as high-quality investment opportunities. The PCAOB sanctioned the audit firm and the partner responsible for the firm’s compliance with independence requirements for the client-advocacy-related independence violations, as well as for violation of quality control standards (PCAOB Release 105-2019-022, September 10, 2019).

– Meredith Ervine