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a. Auditor's independence as it relates to third party reliance upon
financial statements suggests that the auditor's professional
judgment must be self-reliant and not subordinate to the views
of clients in fact or in appearance. Investors, credit grantors,
prospective purchasers of businesses, regulatory agencies of
government, and others may rely on an auditor's opinion that
financial statements fairly reflect the financial position and
results of operations of the enterprise that has been audited. To
be independent, the auditor must not only consciously refuse to
subordinate judgment to that of others, but must also avoid
relationships which would appear likely to warp the auditor's
judgment even subconsciously in reporting whether or not the
financial statements are fairly presented.
Independence means avoidance of situations which
would tend to impair objectivity or create personal bias which
would influence delicate judgments or lead a reasonable
observer to believe that such objectivity might have been
impaired. In its essence, independence is an expression of the
professional integrity of the auditor and is primarily a
condition of mind, character, and appearance.
b.
1.
An auditor's independence "in fact" refers to objectivity,
to the quality of not being influenced by regard to
personal advantage. The auditor is in fact independent if
his or her judgments are uncolored by personal interests,
the interest of client, or other special parties. Thus,
independence in fact exists if the auditor exercises an
objective state of mind.
2.
The auditor is independent in appearance when no
potential conflict of interest exists which might tend to
jeopardize public confidence in the auditor's independence
in fact. For there to be independence in appearance, there
should be no reason to suspect that any factors exist which
may influence the uninhibited exercise of the auditor's
professional judgment.
c.
d.
An auditor may be independent in fact, i.e., have an objective
state of mind, but appear to third parties not be independent.
This situation arises where potential conflicts of interest exist
which might tend to jeopardize public confidence in the
auditor's independence in fact. For example, an auditor might
not appear to be independent through the eyes of third parties,
even though he or she might be independent in fact, if the
auditor or a partner (a) during the period of the professional
engagement or at the time of expressing an opinion, had, or
was committed to acquire, any direct financial interest or
material indirect financial interest in the enterprise, (b) during
the period of the professional engagement, at the time of
expressing an opinion or during the period covered by the
financial statements, was connected with the enterprise as a
promoter, underwriter, voting trustee, director, officer, or key
employee, or (c) renders professional services for a fee which
would be contingent upon the findings or results of such
services, except in certain tax matters when the contingent fee
is determined by a court.
The auditor may not be independent in appearance if there
exists the opportunity for personal advantage as a result of his
or her opinions, even though he or she in fact ignores such
considerations in rendering an objective, unbiased professional
judgment.
1. No. A CPA would be considered not independent for an
audit of the financial statements of a church for which he or
she is serving as treasurer without compensation. The
CPA's independence would be impaired in the eyes of
someone who had knowledge of all the facts, since the
CPA would be reporting on his or her stewardship of the
church's funds as its treasurer, even though without
compensation.
No. A CPA would be considered not independent for an audit of the
financial statements of a club for which his or her spouse is serving as
treasurer-bookkeeper, even though the CPA is not to receive a fee. The
CPA's independence would be impaired in the eyes of someone who had
knowledge of all the facts because the CPA might not be considered
objective and unbiased in evaluating the spouse's stewardship as treasurer
and record keeping as bookkeeper. The fact that the CPA would not receive
a fee would usually not affect independence.
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The purpose of this case study is to demonstrate ways in which the
Rules of Conduct affect the "typical" staff accountant and to
reinforce the student's understanding of these Rules and related
interpretations.
1. This situation relates to Rule 101-Independence. Basically, the
situation would be acceptable providing that Herb does not
assume the role of employee and the client is sufficiently
knowledgeable of the company's activities and financial
condition and the applicable accounting principles so that the
client can reasonable accept responsibility for the work. For SEC
purposes, responsibility for maintenance of the accounting
records must be performed by accounting personnel employed
by the client. Therefore, if Ethical was an SEC client, Herb
could not do this work.
2. This situation relates to responsibilities to clients, Rule 301Confidential Client Information. Herb has violated professional
ethics because Rule 301 states "A member shall not disclose any
confidential information obtained in the course of a professional
engagement except with the consent of the client." 'this does not
apply to a validly issued subpoena or summons enforceable by
order of a court. A CPAs confidential client relationship is
similar to that of an attorney, with one major exception information obtained by an attorney is not subject to subpoena.
3. This situation relates to Rule 101-Independence. If an employee
or partner accepts more than a token gift from a client, even with
the knowledge of the member's firm, the appearance of
independence may be lacking. Good advice would be to never
accept anything from a client at a price less than what other
independent buyers pay.
4. This situation relates to Rule 101-Independence. Interpretation
101-1 states that a member, or a firm of which the member is a
partner or shareholder, shall not express an opinion on financial
statements of an enterprise unless the member and the member's
firm are independent with respect to such enterprise.
Independence will be considered to be impaired if a member or a
member's firm had any loan to or from an enterprise except as
permitted in Interpretation 101-5. The exceptions pertain to
certain collateralized loans, loans against insurance policies, and
credit card and cash advances on checking accounts which meet
certain balance requirements. The exceptions do not include
unsecured loans.
5. This situation relates to Rule 101-Independence. Interpretation
101-1 states that independence will be considered to be impaired
if a member, or a firm of which he or she is a partner, had or was
committed to acquire any direct or material indirect financial
interest in the enterprise.
Cash & Green would not have a problem performing an
independent audit because Herb is not a managerial employee of
the office doing the audit.
Rule 2-01(b) of Regulation S-X applies to SEC clients and states
that "an accountant will be considered not independent with respect
to any person or any of its parents, its subsidiaries, or other affiliates
(1) in which, during the period of his professional engagement or at
the date of his report, he or his firm or a member thereof, had, or
was committed to acquire, any direct financial interest or any
material indirect financial interest....' "...the term 'member' means
'all partners in the firm and all professional employees participating
in the audit or located in an office of the firm participating in a
significant portion of the audit.' Because Herb is not participating in
the audit and is not working in an office of Cash & Green that is
performing the work, the action of the investment club does not
violate the AICPA or SEC independence rules. (Author's note:
Reference to SEC rules is beyond the scope of the chapter. This
material is included for the instructor who wishes to point out the
SEC implications.)