MAFR (FINAL PART)
2. Every individual auditor must comply with independence requirements of Section 290 and 291
of the IESBA Code of Professional Conduct on the following:
a. Financial Interest;
b. Loans and Guarantees;
c. Business Relationships;
d. Family and Personal Relationships;
e. Employment with an Audit Client;
f. Temporary Staff Assignments;
g. Recent Service with an Audit Client;
h. Serving as a Director or Officer of an Audit Client;
i. Long Association of Senior Personnel, including partner rotation with an audit client;
j. Provision of Non-Assurance Services to Audit Clients;
k. Fees;
l. Compensation and Evaluation Policies;
m. Gifts and Hospitality; and
n. Actual or Threatened Litigation.
Independence whether in a firm or engagement context is reliant of the honesty and integrity of
the partners and his/her professional staff. Reliance is therefore individual based and although
such process have been into statutory obligations, no legal provision can control a person who has
the intent of dishonesty.
That is why ISQC1.31 requires the firm to establish policies and procedures to assign appropriate
personnel with the necessary competence, and capabilities to perform audit engagements. One of
the most difficult independence to control via legislation is the “Familiarity Threat” which occurs
when an auditor becomes too sympathetic to the client’s interests because he has a close
relationship with an assurance client, its directors, officers or employees.
Relationships between auditors and their clients can create a closeness with management that
may adversely affect the auditor’s independence and reduce the reliability and quality of the audit.
It is alleged that relationships that were “too close” have led to the external auditor’s inability to
scrutinize transactions and contributed to recent dramatic audit failures at several high-profile
companies (e.g. Enron, WorldCom, Xerox, etc.) The Wall Street Journal characterized one of these
arguably “too-close” relationships as follows: “Andersen auditors and consultants were given
permanent office space at Enron. They shared in office birthdays, frequented lunchtime parties
people just thought they were Enron employees” (Herrick and Barrionuevo, 2002). It is almost
impossible for any legislation to control such behavior.
Congressman Shelby as far back as 1985 pointedly asked on the floor of the House of
Representatives:
How can an audit firm remain independent when it has established long-term personal and
professional relationships with a company by auditing that company for many years, some 10, 20,
or 30 years? Same questions that the IRBA are asking currently.
Audit process structurally floored as it is reliant completely on humans who make mistakes.
• The IRBA have cited many reasons for this. The most significant being:
• Familiarity threat between CFOs and incumbent auditors.
• Familiarity threat between audit committee chairs and incumbent auditors.
• Long audit tenure of audit firms.
Lack of auditor independence from the client firm is also a matter of concern. One suggested
avenue to address these concerns is to place term limits by enforcing mandatory audit firm
rotation (MAFR).
These mistakes are costly (ENRON/MASTERBOND).Prior to accepting a client auditor must ensure
that the members of the engagement team meet the relevant independence requirements.
Engagement team made up of partner and professional staff. Steps auditor follows during audit to
maintain independence only based on individual honesty and integrity:
• Declarations of any matters that impact independence.
• Partner monitoring and concluding on independence.
• Code of Professional Conduct which is principles based.
• No laws can control a person who has the intent of dishonesty or prepared to stretch the
law to breaking point.
o
To reduce familiarity threat (Relationships between auditors and their clients can
create a closeness with management that may adversely affect the auditor’s
independence and reduce the reliability and quality of the audit).
§ The Wall Street Journal characterized one of these arguably “too-close”
relationships as follows: “Andersen auditors and consultants were given
permanent office space at Enron. They shared in office birthdays,
frequented lunchtime parties people just thought they were Enron
employees” (Herrick and Barrionuevo, 2002). It is almost impossible for any
legislation to control such behavior.
• Partner rotation introduced – but ignored the rest of the engagement team.
o
Partner despite signing audit report spends the least amount of time on audit.
o
By rotating partner the majority of the engagement team which comprise most of
the familiarity threat have been forgotten.
• To eliminate familiarity threat means rotating the entire team – HENCE MANDATORY
AUDITR FIRM ROTATION. (MAFR)
o
By rotating audit firm eliminating the human element completely.
o
The firm rotates no human element involved.
• Effective corporate governance measure – auditor has no incentive to bend rules to try and
keep client.
10. Conclusion
Supporters argue that MAFR promotes diligence and conservative decision-making by auditors, as
they will be aware, particularly towards the end of their term, that a new firm will be scrutinising
their work with ‘fresh eyes’. This argument is clearly illustrated by the testimony of Biggs,
Chairman, President and CEO of TIAA-CREF during the 2002 Congressional Hearings prior to the
enactment of SOX:
‘Had Arthur Andersen in 1996 known that Peat Marwick was going to come in in 1997, there would
have been a very different kind of relationship between them and Enron. Clearly, they would have
wanted to have their work papers in order, all of the deals documented and well explained. They
might well have challenged Enron’s management in that early period where Enron was changing
its accounting … I would think that there is a very high probability that had rotation been in place
at Enron with Arthur Andersen, you would not have had the accounting scandal that I think we
now have …’
A striking feature of regulatory systems is that existing regulations can tend to be more willingly
accepted than proposed new regulations – the latter being seen as too controversial, risky, one
sided and applicable only in certain circumstances or generally just unproven. It is forgotten that
this was just how the regulations in place today were probably once viewed (when initially
proposed) and yet they somehow managed to make it onto the statute book or the official
regulatory code. Finally, it could be argued that, as a subject, both auditing and regulation need to
break free in South Africa from what can be quite conservative shackles.
of the IESBA Code of Professional Conduct on the following:
a. Financial Interest;
b. Loans and Guarantees;
c. Business Relationships;
d. Family and Personal Relationships;
e. Employment with an Audit Client;
f. Temporary Staff Assignments;
g. Recent Service with an Audit Client;
h. Serving as a Director or Officer of an Audit Client;
i. Long Association of Senior Personnel, including partner rotation with an audit client;
j. Provision of Non-Assurance Services to Audit Clients;
k. Fees;
l. Compensation and Evaluation Policies;
m. Gifts and Hospitality; and
n. Actual or Threatened Litigation.
Independence whether in a firm or engagement context is reliant of the honesty and integrity of
the partners and his/her professional staff. Reliance is therefore individual based and although
such process have been into statutory obligations, no legal provision can control a person who has
the intent of dishonesty.
That is why ISQC1.31 requires the firm to establish policies and procedures to assign appropriate
personnel with the necessary competence, and capabilities to perform audit engagements. One of
the most difficult independence to control via legislation is the “Familiarity Threat” which occurs
when an auditor becomes too sympathetic to the client’s interests because he has a close
relationship with an assurance client, its directors, officers or employees.
Relationships between auditors and their clients can create a closeness with management that
may adversely affect the auditor’s independence and reduce the reliability and quality of the audit.
It is alleged that relationships that were “too close” have led to the external auditor’s inability to
scrutinize transactions and contributed to recent dramatic audit failures at several high-profile
companies (e.g. Enron, WorldCom, Xerox, etc.) The Wall Street Journal characterized one of these
arguably “too-close” relationships as follows: “Andersen auditors and consultants were given
permanent office space at Enron. They shared in office birthdays, frequented lunchtime parties
people just thought they were Enron employees” (Herrick and Barrionuevo, 2002). It is almost
impossible for any legislation to control such behavior.
Congressman Shelby as far back as 1985 pointedly asked on the floor of the House of
Representatives:
How can an audit firm remain independent when it has established long-term personal and
professional relationships with a company by auditing that company for many years, some 10, 20,
or 30 years? Same questions that the IRBA are asking currently.
Audit process structurally floored as it is reliant completely on humans who make mistakes.
• The IRBA have cited many reasons for this. The most significant being:
• Familiarity threat between CFOs and incumbent auditors.
• Familiarity threat between audit committee chairs and incumbent auditors.
• Long audit tenure of audit firms.
Lack of auditor independence from the client firm is also a matter of concern. One suggested
avenue to address these concerns is to place term limits by enforcing mandatory audit firm
rotation (MAFR).
These mistakes are costly (ENRON/MASTERBOND).Prior to accepting a client auditor must ensure
that the members of the engagement team meet the relevant independence requirements.
Engagement team made up of partner and professional staff. Steps auditor follows during audit to
maintain independence only based on individual honesty and integrity:
• Declarations of any matters that impact independence.
• Partner monitoring and concluding on independence.
• Code of Professional Conduct which is principles based.
• No laws can control a person who has the intent of dishonesty or prepared to stretch the
law to breaking point.
o
To reduce familiarity threat (Relationships between auditors and their clients can
create a closeness with management that may adversely affect the auditor’s
independence and reduce the reliability and quality of the audit).
§ The Wall Street Journal characterized one of these arguably “too-close”
relationships as follows: “Andersen auditors and consultants were given
permanent office space at Enron. They shared in office birthdays,
frequented lunchtime parties people just thought they were Enron
employees” (Herrick and Barrionuevo, 2002). It is almost impossible for any
legislation to control such behavior.
• Partner rotation introduced – but ignored the rest of the engagement team.
o
Partner despite signing audit report spends the least amount of time on audit.
o
By rotating partner the majority of the engagement team which comprise most of
the familiarity threat have been forgotten.
• To eliminate familiarity threat means rotating the entire team – HENCE MANDATORY
AUDITR FIRM ROTATION. (MAFR)
o
By rotating audit firm eliminating the human element completely.
o
The firm rotates no human element involved.
• Effective corporate governance measure – auditor has no incentive to bend rules to try and
keep client.
10. Conclusion
Supporters argue that MAFR promotes diligence and conservative decision-making by auditors, as
they will be aware, particularly towards the end of their term, that a new firm will be scrutinising
their work with ‘fresh eyes’. This argument is clearly illustrated by the testimony of Biggs,
Chairman, President and CEO of TIAA-CREF during the 2002 Congressional Hearings prior to the
enactment of SOX:
‘Had Arthur Andersen in 1996 known that Peat Marwick was going to come in in 1997, there would
have been a very different kind of relationship between them and Enron. Clearly, they would have
wanted to have their work papers in order, all of the deals documented and well explained. They
might well have challenged Enron’s management in that early period where Enron was changing
its accounting … I would think that there is a very high probability that had rotation been in place
at Enron with Arthur Andersen, you would not have had the accounting scandal that I think we
now have …’
A striking feature of regulatory systems is that existing regulations can tend to be more willingly
accepted than proposed new regulations – the latter being seen as too controversial, risky, one
sided and applicable only in certain circumstances or generally just unproven. It is forgotten that
this was just how the regulations in place today were probably once viewed (when initially
proposed) and yet they somehow managed to make it onto the statute book or the official
regulatory code. Finally, it could be argued that, as a subject, both auditing and regulation need to
break free in South Africa from what can be quite conservative shackles.
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