ANAN 2012 MCPD. A PAPER Titled. AUDIT QUALITY AND AUDITORS INDEPENDENCE. AUDIT QUALITY AND AUDITORS INDEPENDENCE. Delivered by Mrs. Christiana Ndirika Okafor BSc PGD MBA MCIA MNIM CIPMN ACMA FIPFIM (UK) CNA. 1. INTRODUCTION
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ANAN 2012 MCPD A PAPER Titled AUDIT QUALITY AND AUDITORS INDEPENDENCE
AUDIT QUALITY AND AUDITORS INDEPENDENCE Delivered by Mrs. Christiana Ndirika Okafor BSc PGD MBA MCIA MNIM CIPMN ACMA FIPFIM (UK) CNA
1. INTRODUCTION Auditing, as we know plays a vital role in our society by reducing the information risk that users assume when they rely on information provided by mangers of businesses of government, individual or private sector firms. An investor as a user of accounting information for instance, may want to known whether an entity’s Financial Statements are presented in accordance with the generally accepted accounting principles (GAAP). In that circumstance, he is actually seeking for a trusted and reliable Financial Statements that will not at all deceive and lead him into wasting his money. Members of an entity’s Board of Directors may want to know whether employees in the procurement department are complying with the entity’s established policies and procedure, which were designed to reduce the likelihood of kickbacks. We often watch legislators spend long useful hours to identify the correct and adequate fiscal allocation that a particular ministry requires to carry out its goals. The aim of these efforts is to identify credible information.
INTRODUCTION (CONT.) • The reduction of information risk in financial sector has turned in great measure to be a big challenge in particular, to Accountants and Auditors. This topic is poised to us Professional Accountants in this year’s MCPD for insight and discourse. • The issue of Auditor’s Independence as an essential platform for quality audit is not debatable. Auditor’s Independence is commonly referred to as the cornerstone of the auditing profession since it is the foundation of the public’s trust in the accounting profession. More so in this present era of the adoption of new globally accepted rules on financial reporting, the International Financial Reporting Standards (IFRS) and our nation’s yearn for direct foreign investment for national development.
2.DEPTH OF CHALLENGES Since 2000, a wave of high profile accounting scandals have cast the profession into the limelight, negatively affecting the public perception of auditor’s independence. For instance in December 2 2001, the US energy giant Enron bankruptcy caused Andersen Accounting Firm guilty of obstruction of justice offences, since then Andersen firm disappeared. Also in June 25th 2002, the global telecom giant WorldCom that admitted 3.8 billion dollars in cost, incorrectly counted as capital expenditure went down as well. Events in the public sector and failures in the quality of government audits led the US Government Accountability Office (GAO) to recommend that public sector entities consider the benefit of using audit committees. In 2003, The GAO revised government-auditing standards to require that auditors communicate certain information to the Audit Committee or to the individual with whom they have contracted for the audit. Each government committee must designate an audit committee or equivalent body to fulfill the role of financial oversight.
DEPTH OF CHALLENGES(CONT.) • Apart from some of the international instances mentioned above, we are also very familiar with some national cases. Aruwa & Atabs (2011) provided instances of creative accounting and fraudulent financial reporting in Nigeria to include Alpha Merchant Bank Plc-accounting problem and market manipulation, Lever Brothers Plc-exaggerated profit through the use of questionable accounting methods and AP Petroleum Plc-false financial reporting. The Cadbury Nigeria Plc misstatement case, which overstated its earnings in its books of account and sanctioned by the Security and Exchange Commission, is well known. In the Nigeria banking sector, according to the Guardian Newspaper of 21 August 2009, the audit conducted by the Central Bank of Nigeria (CBN) into the activities of the some registered banks in 2009 revealed that they were experiencing huge financial difficulties in their operations. Consequently in August 2009, CBN injected N420 Billion ($2.8 Billon) into the first five banks (Afribank, FinBank, Intercontinental Bank, Oceanic Bank and Union Bank) which failed the CBN Audit. Two months later, an additional N200 billion was injected to stimulate the liquidity of four other banks (Bank PHB, Equatorial Trust Bank, Spring Bank and Wema Bank). This injection was done to stabilize the banks and ensure they remained going concerns after their former MDs were sacked for reckless lending and lax in corporate governance (Nigeria Tribune 17 August 2009 and This Day 12 December 2009.)
DEPTH OF CHALLENGES(CONT.) • Recently also, the Guardian newspaper of 17 October 2011, carried a report that 374 government agencies are yet to clear since 1999 to date the backlog of unaudited accounts and submit to the Auditor-General of the Federation as required by law. The Public Accounts Committee (PAC) of the National Assembly and the Auditor-General are yet to agree on the reasons for such serious lapses by the managers of public funds. • It is no news that every one of us voluntarily or involuntarily lay the blame for inefficient allocation of scare economic resources and unethical sharp practices to the next door. Professional Accountants to whom do or where do we shift the blame? • Professional Accountants and Auditors in particular, here are part of our worries. We must be motivated to proffer solutions to this great challenge.
As early as 1982, there has been powerful integrated suites of soft wares designed by different IT firms that could help organizations managed a wide range of Audit work such as: • Computer Assisted Audit Tools and Techniques (CAATTs) • PENTANA Audit soft ware by PENTANA IT firm • 3. CHASE Audit software by HASTAM IT firm- CHASE is a flexible cost effective solution for managing audits inspection, compliance assessments and testing of individual competence. • 4. APACE Software designed by ISF Business services for audit planning and control. • We have standards as issued by the former Nigerian Accounting Standard Board (NASB) now Financial Reporting Council (FRC), American Institute of Certified Public Accountants (AICPA), Auditing Practices Committee of the Institutes of Chartered Accountants of England and Wales (ICAEW), International Auditing Standards (IAS) and other such standards issued by different countries.
In spite of the enabling IT audit tools and the various professional standards issued for guidance and efficient audit work, there are still reported cases of lapses and scandals. • The question is why have there been failed banks and companies? Before the main discourse on Quality Audit and Auditor’s Independence, let us quickly have a look at the definition of audit as a subject matter.
3.WHAT IS AUDIT? Auditing according to Kiger & Scheiner (1994) is the systematic process by which a competent, independent person objectively obtains and evaluates evidence regarding assertions about an entity or event, for the purpose of forming an opinion about and reporting the degree to which assertion conforms to an identified set of standards. To attest means to bear witness to the validity of truth of a statement. As we know, when auditors attest, they issue a formal written conclusion about the reliability of an assertion that is the responsibility of another party.
4.ROLE OF AN AUDITOR An auditor essentially is an accounting and compliance specialist who sifts through a company’s internal controls and financial statements. Auditors perform in-depth reviews of corporate controls and mechanisms ensuring that the departmental heads keep a close eye on operating risks in their business units. Auditors pore over a company’s performance data to ensure accuracy and regulatory compliance. For example, management of an entity may assert among other assertions that its financial statements have been prepared in accordance with the required standards. The auditor’s attestation would add credibility or believabilityto each of the assertions. Assertions without undue emphasis are the subject matter of auditing and a crucial step in audit process. Auditors attest toa wide variety of assertions in addition to those incorporated in the financial statements, such as, performance reports, management analysis and discussion of financial statements, statements about the effectiveness or efficiency of operations or statements about compliance with established policies and procedures etc, before forming an opinion. To that degree or extent of responsibility of an auditor, enabling background by regulations and ethics are always in place by accountancy or regulatory bodies to adequately equip the auditor for good work worthy of trust. Let us also quickly look at the concept of an auditor’s independence from a professional perspective.
5.What is Auditor’s Independence? Auditor’s Independence refers to the independence of the auditor from parties, other than shareholders, that have an interest in the financial statements of an entity. It is when an auditor is unbiased in carrying out the audit work. It is essentially an attitude of mind characterized by integrity and an objective approach to the audit process. The concept requires the auditor to carry out his work freely and in an objective manner. The purpose of an audit as earlier highlighted is to enhance the credibility of financial statements by providing reasonable assurance from an independent source that they present a true and fair view to the shareholders and other users of the financial information. This objective will not be met if users of the audit report believe that other parties, more specifically company directors, may have influenced the auditor.
6.Independence in fact and appearance • Auditor’s independence has long been couched in terms of independence “in fact” and independence “in appearance.” An Auditor must be independent in fact, which means that he or she is able to be objective. He or she has the ability to make independent audit decisions even if there is a perceived lack of independence or if the company’s directors place the auditor in a potentially compromising position. • Nonetheless, even when the auditor is in fact independent, one or more factors may lead the public to believe the auditor does not appear independent. This may cause users of financial statements to believe they cannot rely on financial information.
Because auditor independence in fact is a mental state, investors and other users of financial statements cannot accurately assess actual auditor’s objectivity; they can only evaluate an auditor’s appearance of objectivity. Thus, even when an auditor acts independently in fact and issues an unbiased audit opinion, investor confidence is eroded if investors and other users of the financial statement information do not perceive that the auditor was independent in appearance. Many difficulties as earlier said lie in determining whether an auditor is truly independent, since it is impossible to observe and measure a person’s mental attitude and personal integrity. To close that gap the auditor must also be independent in appearance, which means they must avoid relationships that appear to impair their objectivity. Such relationships include having a financial interest in a client or business relationship with a client other than to render public accounting services. Arthur Andersen, Enron’s former auditor, was perceived as lacking independence, because the accounting firm earned more revenue from non-audit services than from audit services. While independence in fact and in appearance are both required in order to achieve the goal of independence, the Enron debacle, the Nigeria Cadbury Plc and some failed banks and other cases have caused a negative publicity in the auditing profession and may have altered the public’s expectations particularly in current times. Auditors in public practice in particular must continuously assess relationships with attestations affirmed for clients to ensure that they are independent in fact and appearance.
7.Some Regulatory Frameworks on Auditor’s Independence 1) The US Institute of Management Accountants (IMA) clearly stated five fundamental principles of ethical conduct among which is the Auditor’s Independence. Others principles are Competence, Confidentiality, Integrity, Objectivity. 2) In Nigeria, auditor’s Independence, Conflict of Interest and other required ethical conducts are clearly stated in the newly enactedFinancial Reporting Council (FRC) Acts of 2011 under Section 26. It approved the establishment of a Directorate of Auditing Practice Standards to monitor the activities relating to auditing and reporting. The whole subsections (a-f) dwelt on the auditing and ethical standards required of an auditor. Subsection 26e specifically empowers the council to and I quote ‘encourage establishment of ethical standards in relation to the independence, objectivity, and integrity of external auditor and those providing assurance services. Also Section 46, 47 and 48 specifically referred to full independence of auditors and how to handle conflict of interests in the course of engagement. Section 61 of the same Act, states that the annual review (inspections) of professional accountants that audit more than 20 public interest entities will commence soon. I would also refer you for want of time to the whole of Section 62 on power of investigation by council. It dwelt on sanctions for potential defaulters of any kind of professional misconduct or unethical practice.
As we know, Section 74 of the FRC Act repealed the NASB Act of 2003. Section 75 stated and I quote “Any reference made to the Nigerian Accounting Standards Board as provided under Section 335(1) of the Companies and Allied Matters Act, and any other related or relevant legislation shall be construed to refer to the Financial Reporting Council established under Section 1(1) of this Act. 3) Within the United Kingdom, there are various regulations in force regarding auditor’s independence. The main enforcement of auditor’s independence is through the Companies Act 1985 and the Companies Act 1989 although the matter is also covered by the professional accounting bodies’ rules of professional conduct and the Auditing Practices Board (APB). It is also of note that regulations (i.e. International Accounting Standards or International Reporting Standards) relating to the preparation of financial statements are also relevant. 4) The American Institute of Certified Public Accountants (AICPA) in its Rules of the Code of Professional Conduct No 101 treated the issue of auditor’s independence. Since independence is a state of mind and cannot really be evaluated by others, AICPA interpretation of being independent focused on situations that impair a member’s appearance of independence. Independence shall be considered to be impaired if, for example, a member had any of the following transactions, interests, or relationships:
A. During the period of a professional engagement or at the time of expressing an opinion, a member or member firm 1. Has or was committed to acquire any direct or material indirect financial interest in the enterprise. 2. Was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire any direct or material indirect financial interest in the enterprises? 3. Had any joint, closely held business investment with the enterprise or with any officer, director, or principal stockholders thereof that was material in relation to the member’s net worth or to the net worth of the member’s firm. 4. Has any loan to or from the enterprise or any officer, director, or principal stockholder of the enterprise except as specially permitted in the interpretation 101-5.
B. During the period covered by the financial statements during the period of the professional engagement, or at the time of expressing an opinion, a member or a member’s firm. • 1. Was connected with the enterprise as a promoter, underwriter or voting trustee, as a director, or in any capacity equivalent to that of a member of management or of any employee. • 2. Was a trustee for any person or profit-sharing trust of the enterprise? • In US, member of American Institute of Certified Public Accountants (AICPA) for instance, who do not engaged in public practices are exempted from maintaining the appearance, but are rather required to be objective. For example, a CPA working for a business could not be considered to be independent in appearance but is expected to be objective in decision making. The detailed interpretation and other related issues can be assessed through AICPA website.
8. The Varying Concepts of Auditor’s Independence The auditor’s independence can manifest itself in three main ways. Programming independence Investigative independence Reporting independence Programming independence – This essentially protects the auditor’s ability to select the most appropriate strategy when conducting an audit. Auditors must be free to approach a piece of work in whatever manner they consider best. As a client company grows and conducts new activities, the auditor’s approach will likely have to adapt to account for these. In addition, the auditing profession is a dynamic one, with new techniques constantly being developed and upgraded which the auditor may decide to use. The strategy/proposed methods, which the auditor intends to implement, cannot be inhibited in any way. Programming independence protects auditors’ ability to select appropriate strategies. Investigative Independence protects the auditor’s ability to Implement the strategies in whatever they consider necessary. Auditors must have unlimited access to all company information. The company must answer any queries regarding a company’s business and accounting treatment. The collection of audit evidence is an essential process, and cannot be restricted in any way by the client company. Reporting independence protects the auditors’ ability to choose to reveal to the public any information they believe should be disclosed. If company directors have been misleading shareholders by falsifying accounting information, they will strive to prevent the auditors from reporting this. It is in situations liked this, that auditors independence is most likely to be compromised. It is here also that the auditor must insist and must be seen to be independence in fact and appearance.
9. Standards of Reporting Due to the theme of the 2012 MCPD, ‘Developments in Corporate reporting and Auditing”, this paper will concentrate on the third type. Reporting Independence The primary result of an audit is the written audit report. The standard of reporting requires that auditors evaluate financial statements and in fact, any type of audit in terms of conformity with the requirements of the approved standards such as the SAS, GAAP, US GAAS, etc and currently in line with the emerging set of globally accepted accounting rules-International Financial Reporting Standards (IFRS). The Auditors must indicate in his or her written report that the audited work followed the principles and guidelines. He must indicate as a matter of emphasis that those principles have been consistently applied, ensures that disclosure is adequate and indicate clearly an opinion concerning that statement. In all kinds of audit work, be it financial statement audit, compliance or operational audit, each requires auditor’s report. The crust of the matter lies on this report. This report knows no bound of the type of auditor –Independent or External, Internal Auditors, and Government Auditor, each applies the rules as related to the kind of work carried out. Such credible report is expected by the society from the auditor.That is when we begin to talk about value for money audit. Quality report is necessary in order to identify leakages, wastages, and other rigidities holding our nation’s development. Leakages and rigidities such as corruption, mistrust of public and professional trust, distressed banks and companies and various bane of the society in various shapes seeking for immediate attention.
Watch the recent web site publication of the Accounting Standard Board (ASB) of UK titled: Cutting Clutter: Combating Clutter in Annual Report’. In effect, the presentation by the Chairman of the UK Accounting Standard Board Mr. Roger Marshall is saying that clutter in Financial Reports is a problem obscuring relevant information and making it harder for users to find the salient points about the performance of the businesses and its prospects for long-term success. Therefore, a quality report for financial users should be clear, straightforward and to the relevant honest points. The emphasis is that all those involved in regulation, reviewing, preparing and using annual reports have to change their behaviours if we as professionals are to remove clutter and improve on Corporate Reporting. Remember that our theme this year is Developments in Corporate Reporting and Auditing. Because of the reliance placed on the auditor’s report, professionally audit reports must contain specific content and language. Although slight variances exist in practice, most standard unqualified audit reports for instance contain as follows: Addressee, introductory, scope of work, auditor’s opinion and signature of the firm.
Example of an Unqualified Audit Report • To the Stockholders/Management of XXX Company/Establishment • We have audited the accompanying books of the XXX as of December 31, 20XX, and the related statements of income, retained earnings, cash flow for the year ended. The financial statement is the responsibility of the management. Our responsibility is to express an opinion on the financial statement based on our audit. • We conducted our audits in accordance with the generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statement is free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well evaluating the overall financial statement presentation. We believe that our audit provide reasonable basis for our opinion. • In our opinion, the financial statements referred to above present fairly, in material respects, the financial position of XXX company or Entity as at December 31, 20XX, and the results of its operations and its cash flow for the year ended in conformity with the generally accepted accounting standards • Signature • Date of the Report
There are other circumstances an auditor may issue reports with the following types of opinion. 1. Unqualified with explanatory language and paragraph. This is issued when an auditor has conducted an audit with no scope limitation and believes the statements are presented in accordance with GAAP, but must call important matters to the readers’ attention. For example, an explanatory paragraph is included when uncertainties or substantial doubt exists about the entity’s ability to remain a going concern and when accounting principles are not consistently applied. When the auditor’s opinion is based in part on another’s report, explanatory language is added. 2. A qualified opinion is issued when (1) the auditor is unable to gather sufficient evidence to serve as a basis for an opinion or (2) the client’s failure to follow GAAP in preparing the financial statement. The auditor may be unable to obtain sufficient evidence either because the evidence is unavailable or because the client restricts the scope audit. When a scope limitation exits, the report should identify the scope limitation in the second paragraph, and the opinion paragraph should state that, except for the possible effects of the omitted procedure on the financial statement, the financial statement are presented fairly. When a material deviation exists, the report should describe the deviation in a paragraph preceding the opinion and modify the opinion. 3.An adverse opinion asserts that the financial statements are not presented in accordance with GAAP. The report identifies what the deviations are and the monetary effect they have on the financial statement. 4. A disclaimer of opinion indicates that the auditor does not express an opinion. When a report with a disclaimer of opinion is issued, the auditor must identify any deviation from GAAP in the financial statement.
As professional accountants we can identify what circumstances will make an auditor issue a disclaimer or adverse opinion. The circumstances or the challenges and how we professionally handle them, make us good accountants worth the onion. Like Robert Goizueto (1931-1997) said, “The vision of an accountant, the secret isn’t counting the beans; it is growing more beans. The growing more beans here connotes our effective contribution to national growth and development as professionals in the financial sector and not just as the public often times perceive us as counting money and ticking the books.
Examples of Field Work Experiences and Challenges for Discussion 1. When an organization is in a backlog of unaudited annual A/C for five years, and a new auditor is appointed to do an audit work for a particular year proceeding the years before. As an auditor, what will you do if you notice on appointment such lapse? How does this challenge check on lapse for non-audit service? 2. When a material loss is probable and financial statement cannot be adjusted, what will you do? Answer: Add an explanatory paragraph after the opinion. See the recent FRC Act section 45 (1 & 2) Auditor may choose to issue a disclaimer of opinion of uncertainty. 3. Substantial doubt exists about an entity’s ability to remain a going concern (See attached appendix 3 for the treatment/answer) 4. In the case of a government establishment, over procurement of fixed assets not installed for use over the years, yet with high personnel cost shown in the books with little or no revenue collected for the government. (Treated same as 3 above) 5. Do we agree or disagree with some public opinions like these, ‘It is not want of standards but of will, lays a value for money audit’. ‘Too many regulations too little compliance in the field that is what has been seen in real terms’ .
10. A Competent, Independent and Credible Auditor- The Hallmark of Quality Audit • To produce quality audit, an auditor must be competent; that is he or she must know what types of evidence to gather, and how to evaluate them to reach correct conclusion. In addition, the auditor must understand the criteria to be used in evaluating; whether the information conforms to the established standard. He must understand the environment of the firm in terms of policies and procedures, identify the appropriate procedures to test the controls involved and the standards to apply in the course of audit work. The three general ethical standards of Generally Accepted Auditing Standards (GAAS) for instance relate to the personal integrity, education and professional qualifications of auditors. • Personal Integrity • Maintain Independence in Mental Attitude-Must be objective and approach the audit with a mental attitude that is free of bias or prejudice for or against the entity. • 2.Educational Qualification • Have adequate academic and technical proficiency. Practical experience and professional up to date experiences got through continuous development programmes. In our own case, our MCPDs and annual conferences. These programmes no doubt contribute immensely to the auditor proficiency. Auditors are expected to posses a high degree of multidisciplinary knowledge of accounting and business related subjects. • 3. Professional Competence • Exercise Due Professional Care. That is, an auditor is professionally responsible for fulfilling his or her duties diligently and carefully in planning the audit as well as in gathering audit evidence.
11)Financial Reporting Council of Nigeria Requirements for Registration of Accountants ―A Control for Quality Audit Section 41(1-6) of the FRC Act of 2011 among others requires the Council to maintain a register of professionals. Subsection 2 specifically stated that, “A person shall not hold any appointment or offer any service for remuneration as a professional for public interest entities, unless he is registered under this Act”. Please visit the FRC Nigeria web site www.financialreportingcouncilofnigeria.gov.ng and download the registration form. Fill as applicable to you, EITHER AS AN INDIVIDUAL PROFESSIONAL OR A REGISTERED FIRM. It is on going now and very important an exercise.
12) Framework for managing audit quality In recent times in the financial sector, auditor Independence is viewed seriously in order to ensure credibility in the accountancy profession in particular. Due to the reported cases of lack of auditor’s independence, the issue of auditor’s engagement in other services apart from pure audit work is now a contentious issue. The Issue of Non Audit Services (NAS) • It is common for the audit firm of a company to provide extra services as well as perform the audit. Helping a company reduce its tax charges or acting as a consultant. If non-fees are substantial in retaliation to audit fees, suspicions may arise that auditing standards may be compromised. The firm may be biased, as it could want the company to perform well so it can continue to earn the addition fee for their consultancy. This would mean the audit firm would be dependent on the directors and they would no longer be working with independence. • This gives the directors of the large company a commanding position over its audit firm and they may look to take advantage of it. The audit team would feel pressured to satisfy the needs of directors and in doing so would lose their independence.
Several major instances of misstated earnings prompted the SEC in 2000 to adopt rules prohibiting non-audit services inconsistent with auditor independence. These rules identified nine Non Audit Services inconsistent with auditor independence. The rules regarding management functions and human resources were consolidated into a single rule, resulting in eight rules that were subsequently made into law by the Sarbanes-Oxley Act 2002. (The Sarbanes-Oxley Act 2002 mandated that audit committees be directly responsible for the oversight of the engagement of the company’s independent auditor, and the Securities and Exchange Commission (the Commission) rules are designed to ensure that auditors are independent of their audit clients). • Specific Prohibited Non-audit Service (NAS) • The auditor is prohibited from providing the following non-audit services to an audit client including its affiliates: • Bookkeeping • Financial information systems design and implementation
Specific Prohibited Non-audit Service (NAS) (CONT) • Appraisal or valuation service, fairness opinions orcontribution-in-kind reports. • Actuarial services • Internal audit outsourcing services • Management functions or human resources • Broker-dealer, investment adviser, or investment banking services • Legal services and expert services unrelated to the audit Another Question for Discussion: In own environment, this issue of non-audit service prohibition, what should the auditor do when his/her client did not keep the books of account or prepare the Financial Statement? Note, the Accountant of his/her client is likely to be a registered Professional Accountant (In the paragraph marked ‘fieldwork experience and challenges for discussion’ above, the paper had earlier highlighted this challenge as a very important subject for discussion)
Specific Prohibited Non-audit Service (NAS) (CONT) While the independence rules allow audit firms to offer consulting services such as information technology (IT) and internal auditing, those services are subject to certain restrictions. Among other things, the rules now require annual disclosure of audit firms’ fees received for auditing, IT consulting and other services. In addition to the specific prohibited service, an audit committee was set up to consider whether any services provided by the audit firm, may impair the firm’s independence in fact and appearance. The Committee set up by US Office of the Accountant-General to ensure auditors’ independence among other financial matters suggested the following: Pre-approval of permitted Services Subject to certain limited exceptions, the audit committee must pre-approve all permitted services provided by the independent auditor (i.e, tax services, comfort letters, statutory audits or other). The commission rules include certain pre-approval requirements that the audit committee must follow. In addition, the audit committee should be informed about the services expected to be provided by the audit firm to understand whether the audit firm’s independence will be impaired. The audit committee should consider whether company policies and procedures require that all audit and non- audit services are brought before the committee for pre-approval. Also, listing company standards require audit committees to pre-approve all audit, review and attest services regardless of whether the firm performing the services is the company’s principal auditor.
Specific Prohibited Non-audit Service (NAS) (CONT) Prohibited Relationships • Certain relationships between audit firms and the companies the audit are not permitted. These include: • Employment relationships- A one-year cooling off period is required before a company can hire certain individuals formerly employed by its auditor in a financial reporting oversight role. The audit committee should also consider whether the hiring of personnel that are or were formerly employed by the audit firm might affect the audit firm’s independence.
Contingent Fees-Audit committees should not approve engagements that remunerate an independent auditor on a contingent fee or a commission basis. Such remuneration is considered to impair the auditor’s independence. Direct or material indirect business relationships. Audit firms may not have any direct or material indirect business relationships with the company, its officers, directors or significant shareholders. Thus, audit committees should consider whether the company has implemented processes that identify such prohibited relationships. Certain Financial Relationships-Audit committees should be aware that certain financial relationships between the company and the independent auditor are prohibited. These include creditor / debtor relationships, banking, broker-dealer, futures commission merchant accounts, insurance products and interests in investment companies. Communications between the Audit Committee and the Independent Auditor Independence Standards Board Standard No. 1 requires that the auditor disclose to the audit committee in writing all relationships between the audit firm and the company that may reasonably be thought to bear on the audit firm’s independence. Standard No. 1 also requires the auditor to confirm and discuss its independence with the audit committee. The audit committee should consider discussing the following issues with the auditor in regards to the firm’s independence disclosure: Processes the audit firm uses to ensure complete disclosure of all relationships with the company and its affiliates Relationships the audit firm may have with officers, board members and significant shareholders. Relationships not included in the communication because they were deemed immaterial
Various accounting bodies have put in place some measures. Some set up audit committees or monitoring groups to monitor a wide range of developments in financial reporting which include any likely issue or action that can cause impairments on auditor’s independence. An efficient audit committee as an oversight unit can increase the integrity and efficiency of the audit process, as well as the system of internal controls and financial reporting. In our case, the recently enacted FRC Act dealt extensively on that in section 15 subsection 4 and section 28 subsections 1-4. (Please see the appendices 1 & 2 attached at the end of the paper for details)
13) Need for a Credible Auditor-The Way Forward • Credible personality • Competency-This entails a multidisciplinary accountant, sound and balanced in judgment through MCPD, further training and retraining • Creative and confident accountant • Interest to acquaint self with developments in the profession with a view to applying best practices • Acquaint self with relevant legal and regulatory requirements • Make friends and interact with stakeholders in the sub-sector and members of related professions • Will power and conviction to contribute own quota to transforming the society • Well remunerated Auditor (Government or External Auditor) • Commitment to changing Independent Auditors after the statutory stated period • Sanction of erring auditor by the professional body
Need for a Credible Auditor-The Way Forward (CONT.) Commendation for good performance by professional bodies for bold firms or individuals that assert the given authority Value-reorientation Computer literate and update of knowledge of computer and relevant toolkits Commitment and hard work A vision to producing truly ‘fair view’ of work Firm application of new FRC provisions or fallout guidelines in the Act of 2011 Drive to eliminating quacks in the profession
14) Recommendation i) Put in place classified mediums for research, interactions and reviews with other stakeholders on Financial Management and Reporting, its regulations and legislations to meet up with the fast changing world. The recent journal of Government and Financial Accounting Research initiated by ANAN & published by GAFAR Centre is worthy of commendation. ii) Have a dynamic resource ANAN group that will be providing toolkits on various aspects of financial reporting and audit. iii) Practice very soon in concrete terms, the FRC provision in subsection 26(f) which stated thus; ‘Collaborate with relevant professional bodies to advance public understanding of the roles and responsibilities of external auditors and the provider of assurance services including the sponsorship of research’. I strongly believe that ANAN will turn the paper statement into concrete measurable results in no time.
15) Conclusion Auditor independence as we have seen no doubt helps to ensure quality audits. It also contributes to financial statement users’ confidence and reliance on the financial reporting process. However, in the face of business diversification trend, and varied environmental forces who can be sure not to re-create from independent professional image. Nevertheless, know that the era of maintaining status quo is gone. Global challenges with emerging regulatory and enforceable rules are now many and at our doorstep. The new strongly backed up unified independent regulatory accounting body in Nigeria-the Financial Reporting Council (FRC), IFRS and the Fiscal Responsibility Commission are in place. Now, compliance monitoring is more than ever before seriously addressed from the platform of legislation and professionalism. The consequences for negligence are obviously in place. The clarion call to maintain auditor Independence by professional accountants is again echoed through this paper. Accountants, be more than ever before, energized, dynamic and more cautious to face emerging developments and be determined to launch into the cycle of the power to know and comply as required. Thank you.
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SOME RECOMMENDED WEBSITES TO VISIT FOR UPDATE OF KNOWLEDGE ON COMTEMPORARY ISSUES 1. www.sec.gov/about/offices/oca/ocaprof.htm. 2. Sec Reporting Softwares-www.rivetsoftware.com 3. http//www.unifiedcompliance.com (For Checking Compliance Audit Checklist) 4. http//www.nysscpa.org.cpa 5. AICPA Journal Website 6. Chartered Accountant.Com 7. www.journalofaccountancy.com