Businesses need to consider whether they are engaged with a truly independent auditor to avoid potentially exposing their company to unnecessary risk, costly mistakes or even non-compliance.
An auditor presents an opportunity for a business to have their financials thoroughly checked by a fresh set of objective eyes, and any concerns or potential issues identified and rectified.
It’s vital that those eyes aren’t clouded by any form of bias, even subconsciously.
As a company, you should be doing all you can to ensure you are meeting the relevant standards and regulations, and having someone who is truly independent is one of the strongest lines of defence you can have.
Failing to have a truly independent auditor can potentially result in increased compliance risk, potential legal liability and even the possibility of a loss of trust from customers and shareholders.
An Auditor not only needs to be independent of mind to ensure professional judgement is not compromised, but also independent of appearance.
This is essentially the ‘pub test’. Would a reasonable person conclude that professional scepticism has been compromised because of how a relationship appears from the outside?
For example, if I were to be on a Board of a company, and yet a partner in my firm was providing audit services to that same company, how might that be perceived by others? Would it give the appearance that independence may be compromised?
Of course, having an independent auditor also presents an opportunity for growth within the business, as that person is better positioned to identify material misstatements and potential unprincipled activities.
Without any conflict of interest, auditors can conduct their assessments with an objective mindset, examining financial records and transactions with a critical eye, and providing valuable feedback in areas where improvement is required.
This vigilance is vital for ensuring that financial statements accurately represent the financial position of the company.
A good, independent auditor can improve performance by identifying areas for improvement and efficiency, which can potentially benefit the business overall.
While the Accounting Professional and Ethical Standards Board (APESB) 110 Code of Ethics outlines the required independence guidelines, businesses should also consider the following before engaging an auditor:
- Service Offerings: What other services does the auditor provide, if any? If your auditor also provides tax or other financial services to your company such as preparing reports, there is a potential for conflicts of interest to arise, even if carried out by different departments or individuals.
- Close Contacts: It’s best to have some separation, in that your auditor should ideally not be related or a close friend, to avoid the threat of ‘familiarity’ and ensure independence of fact and appearance.
- Compliance: When was the last time your auditor underwent a compliance review, and what was the outcome? Have they been required to make improvements or had conditions imposed on their registration?
- Financial Interest: It might seem obvious but it’s vital that the auditor doesn’t have a financial interest or a capacity to make financial decisions in your company, including holding any shares etc.
The notion of auditor independence isn’t just confined to financial matters however and will likely need to be considered more broadly by other sectors, particularly as Environmental Social Governance (ESG) reporting requirements continue to increase.
In fact, prior to the release of the latest International Sustainability Standards, ASIC’s Chair Joe Longo flagged ESG as driving the biggest disclosure changes in a generation for sustainability requirements and climate-related financial disclosures.
It will once again highlight the importance of having a truly independent auditor, to ensure compliance and complete transparency.