Independence: Perception vs reality – time to close the gap

Ever since I was a young lad studying at university, and training to be a Chartered Accountant in the early 1990s, the concept of “independence” and “objectivity” have been the most important principles underpinning the audit function. And without “actual” or “perceived” independence, the value of our audit opinion would be considered worthless.

This has not changed in the 25 years I have been auditing, and it has always been the lifeblood of why we exist as an audit profession.

It has therefore been disturbing to see the many recent headlines about large accounting firms, in particular in the UK, who have potentially compromised their independence, predominantly through the provision on non-audit services.

All audit firms are subject to strict rules and guidelines around independence which have been established through the Corporations Act, professional standards (APES 110) and auditing standards on quality, which are regulated by ASIC and monitored by audit committees.

It is imperative that audit firms, and audit committees, work together to safeguard against any conflicts of interest that could impair independence, even if this is perceived, rather than real or actual.

It is the concept of perceived independence that is the key in my view, as this helps encapsulate the importance of independence of mind and in appearance. Independence in fact (or real independence) is primarily addressed satisfactorily, due to the application of the rules and guidelines mentioned above and strong quality controls adopted by most accounting firms. Independence in appearance (perceived) is more difficult to gauge, as this involves the public and stakeholders who assess independence from the outside and for whom internal safeguards are often not relevant. This may be because they have a mindset of – “how can an audit firm be independent if the same firm is providing consulting services worth millions of dollars?” or “could the auditor potentially be put in a compromising position by the company directors if they had millions in consulting fees that could be lost?”.

It is vital that both forms of independence are achieved, but when large corporate failures occur, such as Carillion, BHS and Patisserie Valerie, and it emerges that the audit firm involved also provided other consulting services, the perceived value of professional independence in the audit is questioned. Essentially a gap arises between the actual level of independence and what is expected by stakeholders.

This is a challenge which needs to be confronted to ensure that audit quality is protected. The provision of consulting services by accounting firms, to companies that they already audit, should be further discussed and challenged internally (in the accounting firms) and by the audit committees of the companies receiving the services. Recently, it has been pleasing to see that ‘those charged with governance’ have become more proactive in assessing both actual and perceived conflicts of interest, even at the detriment of efficiencies for management or costs savings for the organisation.

If the standards are not raised or protected, the quality of the audit will continue to be questioned, and ultimately the audit profession will become under threat. Your local PKF audit partner would be happy to answer any questions you may have about this fundamentally important concept.