PwC

David DevlinDavid Devlin23 April 200223 April 2002

Auditor Independence in a Global Market Place

Outline

1. Independence in Context

2. Objectivity and independence in appearance

3. Principles + Rules v. Rules only

4. Consultancy and advice - the public interest

5. Safeguards - quality assurance and audit committees

6. Should independence codes be the same for all?

Independence in Context

• The objective : High quality financial reporting and audit standards,

consistently applied

• Auditor Independence : Only one element – often too readily identified as the cause

of “audit failure”

Some Elements of Good Financial Reporting [1]

• Internal Company Arrangements

– Effective accounting function

– Good accounting records

– Sound internal controls

– Suitable accounting policies

– Adequate disclosure

– Compliance with law and standards

– Internal audit

– Informed review by directors

– Careful approval of the board and shareholders

Some Elements of GoodFinancial Reporting [2]

• External Audit

– Independent and objective auditors

– Compliance with auditing standards

– Quality assurance system

– Audit report

• Enforcement

– Will apply to large companies

– Will probably apply over time to smaller companies

Objectivity and Independence in Appearance

• Objectivity : - Independence- Integrity

• Independence in Appearance : - Does not actually affect

objectivity of the auditor

- Matters to users offinancial statements

• The audit partner’s independence

Principles + Rules versus Rules Only

• The importance of principles based independence codes

• Why principles based codes are better

• Why principle based standards for auditor objectivity and independence are best

Why Principle-based Standards are Best for Audit Independence

• Are the most demanding standards – prohibit auditors from providing services which compromise their independence

• Reinforce the importance of independence as a constant imperative for individual auditors

• Require auditors to discuss their independence regularly with their client

• Generally contain guidance, restrictions and specific prohibitions in relation to particular circumstances

• Offer the best opportunity for global and European consistency

Consultancy and Advice – the Public Interest [1]

INDEPENDENCE ARRANGEMENTS SHOULD:

• Support the skills base and integrity of the audit team

• Permit other mandates required or expected

• At a minimum facilitate assurance to third parties– Regulators– Other public authorities– Investors and others

Consultancy and Advice – the Public Interest [2]

• Not prevent auditors from giving good advice– Internal controls

• Assistance with financial reporting challenges– Financial instruments disclosures– IAS by 2005

• Enable auditors to develop reporting on new areas:– Business risks– Environmental issues– Non-financial measures– Internet information

Consultancy and Advice- the Public Interest [3]

Irish fee disclosures proposed:

• Statutory Audit Services

• Audit–related Services (e.g. assurance related work)

• Non-audit Services

Audit Committee to confirm audit independence

Consultancy and Advice- the Public Interest [4]

• Does it make sense, in the public interest, to prohibit non-audit services in any general way?

• The principles-based framework approach does prohibit auditors from providing services which would compromise their independence

• This approach is preferred to date in:– The draft EU Recommendation– IFAC Code– Several EU countries, including Ireland and Sweden, for

example

Safeguards – Quality Assurance

• Ethics and independence compliance needs to be subject to quality assurance

• In Ireland, quality assurance is carried out by professional full time staff employed by the Institute of Chartered Accountants

• Compared to peer review, this is not necessarily better, but may appear so

• Increasing interest in public oversight of the profession

Safeguards – Audit Committees

• Audit committees are a most helpful safeguard for auditor independence

• The EU is currently reviewing corporate governance and may examine the role of audit committees

• FEE is currently establishing a working party on corporate governance, with a focus on relations with auditors and on financial reporting

Should Independence Codes be theSame for All?

• Yes, because the requirement for objectivity is the same and the same principles apply

• How the principles apply may differ – it is likely to be less complex in terms of specific procedures in a smaller audit firm

• The threats to the appearance of independence may well be less with a smaller audit client

Outline

1. Independence in Context

2. Objectivity and independence in appearance

3. Principles + Rules v. Rules only

4. Consultancy and advice - the public interest

5. Safeguards - quality assurance and audit committees

6. Should independence codes be the same for all?

PwC

David DevlinDavid Devlin23 April 200223 April 2002

Auditor Independence in a Global Market Place