Fraud in Not For Profits a Real ConcernNovember 13, 2017
An auditor must be independent from the entity it audits. This requirement for independence is legally enforceable under:
- Corporations Act – Divisions 3, 4 and 5 of Part 2M.4 and s307C
- APES 110 Code of Ethics for Professional Accountants
- Auditing standard ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, and Other Assurance Engagements
- Auditing Standard ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information.
An auditor must maintain independence and always be mindful of this across the client/auditor relationship. This Areas for key concern include:
- conflict of interest situations
- general requirements, including the provision of specific non-audit services
- specific relationships of the auditor and/or audit team members with the audited entity
- auditor rotation (listed companies)
- being diligent in identifying and evaluating threats to independence and applying appropriate safeguards
Client’ get a one stop shop for both issue identification and development of solutions. However where the service may not have met expectations, the client may not itself conflicted on what to do.
This can be further complicated where it is unclear whether the information forming the basis for the professional advice, is linked directly or indirectly to a whistleblower service or past audit. Accordingly at a point in time, the client might be expecting an integrated solution based on past audit, current consultancy work and an issue emerging through the whistle blowing function.
Where the client expects the advice to cover the three areas, the professional firm may be precluded from acting in a way to meet client expectations.
From a shareholder perspective it must be difficult to understand how the check and balance and independence is being maintained. The perception of conflict and lack of independence is high as well the likelihood of conflict is high.
It is unclear why shareholders (or regulators) would accept perceived conflict when moving from audit to consultant or performing one of these in addition to providing the whistleblower service.
Consulting firm perspective
While there would be perceived synergies and “client awareness” benefits from providing the service, this approach compromises the systems and controls approach required. The use of chinese walls approach is often promoted as managing the risk. While this may be the firm solution, it is not the best practice for the client.
It is also unclear how this strengthens the “systems approach” for elimination of a hazard. As such this approach is contrary to the accounting principles that underpin the audit.
It would appear that the lessons from arthur andersen and enron may have been lost, with clients and audit firms once again on caution by Mr Medcraft, who retires from the Australian Securities and Investments Commission.