Auditor independence is a crucial determinant in the delivery of audit quality. A key aspect of auditor independence is ensuring that other services provided to an audit client do not impair the auditor's objectivity. Without independence, the value of the auditor's attestation function would be decrease in the eyes of a third party that relies on the auditor's communication. Independence requires objectivity and freedom from bias. And the auditor must favor neither the client nor third parties in gathering evidence and valuation the fairness of financial statements.
Threats to independence are explained in the new Professional Statement F1, which is the standard agreed in November 2001 by representatives of the 120 nations who make up the International Federation of Accountants (IFAC), as:
* Self-interest threats, the possibility that the firm or individuals within it could benefit from a financial interest in the client
* Self-review threats, the possibility that the firm or individuals within it would have to re-evaluate their own work to form a judgment
* Advocacy threats, situations where the firm or individuals within it could promote the audit client's point of view in a manner which compromises objectivity
* Familiarity threats, the possibility that the firm or individuals within it have become too sympathetic to the audit client's interests
* Intimidation threats, the possibility that the firm or individuals within it may be deterred from acting objectively by actual or perceived threats from the audit client
Safeguards fall into three broad categories.
For an auditor, these are:
* Safeguards created by the profession, legislation or regulation, such as education, professional standards, monitoring and disciplinary processes and inspections and review
* Safeguards within the audit client, including competent employees and robust corporate governance structures
* Safeguards within the audit firm, including policies and procedures to implement and monitor...