To start with, the practice of auditing carries with it a lot of responsibilities for the public good and businesses. To the public, auditing is one of the mechanisms for ensuring accountability and transparency in government’s finances. In business circles, auditing is anchored on the general understanding that it helps in obtaining a reasonable assurance that financial statements are free of material misstatements (any piece of information that is sufficiently incorrect that it may impact the economic decisions of someone relying on those statements). That said, the fundamental reason for auditing is to detect and prevent fraud. Fraud can take many forms and involve, for instance, manipulation, alteration of financial records or even suppression of the effects of transactions from records.
To perform audit duties, the nature of the work requires that an auditor should have an independence of mind. Clearly, independence of mind means the state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgement. It is that “free” mind which allows the auditor to act with integrity and exercise objectivity and professional skepticism (questioning mind). I believe that independence of mind can be guaranteed by an environment which is tolerance of the auditor’s professional competence and behaviour to comply with relevant laws and regulations. Nonetheless, an auditor could face a lot of a real or perceived threats in the performance of their duties. I intend to highlights some of these threats and how they can be managed as my contribution to public education on the profession.
Intimidation threat
It is the threat that an auditor will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the auditor. The following situations could create intimidation threats:
- An auditor feeling pressured to agree with the judgment of a client’s employee because the employee has more expertise on the matter in question.
- An auditor being pressured to reduce inappropriately the extent of work performed in order to reduce fees.
- An auditor being threatened with dismissal from a client’s engagement.
- An audit client indicating that it will not award a planned non-assurance contract to the auditor if the auditor continues to disagree with the client’s accounting treatment for a particular transaction.
- An auditor being threatened with litigation by the client.
Advocacy Threat
It is the threat that an auditor will promote a client’s or employer’s position to the point that the auditor’s objectivity is compromised. These are some of circumstances that could create advocacy threats:
- An auditor acting as an advocate on behalf of an audit client in litigation or disputes with third parties.
- An auditor promoting shares in an audit client.
Self-interest Threat
This is the threat that a financial or other interest will inappropriately influence the auditor’s judgement or behaviour. Some of the circumstances which could expose the auditor to self-interest threat include:
- An auditor or member of his assurance team having a direct financial interest in the assurance client.
- An auditor or member of his assurance team having a significant close business relationship with an assurance client.
- An auditor having undue dependence on total fees from a client.
- An auditor being concerned about the possibility of losing a significant client.
- A member of the audit team entering into employment negotiations with the audit client.
Familiarity threat
This threat is influenced by a long or close relationship with a client or employer so much that the auditor will be too sympathetic to their interests or too accepting of their work. These circumstances could create familiarity threats.
- A member of the engagement team having a close or immediate family member who is a director or officer of the client.
- A member of the engagement team having a close or immediate family member who is an employee of the client who is in a position to exert significant influence over the subject matter of the engagement.
- Accepting gifts or preferential treatment from a client, unless the value is trivial or inconsequential.
- Senior personnel having a long association with the assurance client.
Self-review threat
It is the threat that an auditor will not appropriately evaluate the results of a previous judgement made or service performed by the auditor, or by another individual within the auditor’s firm or employing organization, on which the auditor will rely when forming a judgement as part of providing a current service. These are some of the examples of circumstances which could give room to self-review threats.
- A firm issuing an assurance report on the effectiveness of the operation of financial systems after designing or implementing the systems.
- A firm having prepared the original data used to generate records that are the subject matter of the assurance engagement.
- A member of the assurance team being, or having recently been, a director or officer of the client.
- A member of the assurance team being, or having recently been, employed by the client in a position to exert significant influence over the subject matter of the engagement.
- The firm performing a service for an assurance client that directly affects the subject matter information of the assurance engagement.
Safeguards to the Threats
I strongly believe that the following measures may eliminate the threats or reduce them to an acceptable level. In general, there should be:
- Compliance with professional standards.
- Active and professional or regulatory monitoring and disciplinary procedures.
- Improve curriculum to be abreast with global changes, training and experience requirements for entry into the profession.
- Regular and continuous professional development programs.
- Compliance with corporate governance regulations.
These are some of the examples auditors or their firms must do or continue to do to deal with the threats in the work environment:
- The auditor or leadership of his audit firm must stress the importance of compliance with the fundamental principles of objectivity, professional competence and due care, integrity and confidentiality.
- The auditor or leadership of his audit firm must establish the expectation that members of an assurance team will act in the public interest.
- There should exist policies and procedures to implement and monitor quality control of engagements.
- Concerning fees and other types of remuneration, the auditor must make his clients aware of the terms of the engagement and, in particular, the basis on which fees are charged and which services are covered by the quoted fee.
It is worth noting that clients also have responsibilities to mitigate the threats through their systems and procedures. Some of these include:
- They must have competent employees with experience and seniority to make managerial decisions.
- They must implement internal procedures that ensure objective choices in commissioning non-assurance engagements.
- Clients must have a corporate governance structure that provides appropriate oversight and communications regarding firm’s services.
Indeed, some of these measures have been created by the profession, legislation or regulation and require enforcement without dithering. It is the responsibility of all stakeholders to put their shoulders to the wheel and jealously safeguard the auditing profession considering its relevance in national development.
BERNARD BEMPONG
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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