MAFR - PART 3
Another risk might be that major audit firms could implode due to an immediate loss of confidence
and reputation by client companies who become aware of a major audit failure by an individual
audit partner inside the international network, as is commonly held to be the reason for the
collapse of Arthur Andersen in 2002.
A further risk might be an indictment or removal from a register in a major country harming the
brand of the entire network. John Fingleton, Chief Executive of the Office of Fair Trading in the
United Kingdom stated:
‘The market for large company audits lacks sufficient competition and does not work well for
customers. It is highly concentrated, largely supplied by four big firms, with clients rarely switching
between auditors. The barriers to entry for new and smaller competitors were too high. These are
not the indicators of a competitive market.’
London Economics also found that liability risks, combined with the very limited insurance
capacity, are barriers for major mid-tier firms seeking to enter the statutory audit market for large
companies listed on capital markets. As a consequence, there is a fear that the international audit
market for listed companies might not be sustainable over time. The United Kingdom has recently
extended its accounting competition probe. The probe focuses on whether the world's Big Four
accounting firms - KPMG, Deloitte, PricewaterhouseCoopers and Ernst & Young - are restricting
competition in Britain's audit market for the top 350 listed companies. The Competition
Commission faces pressure from politicians who believe that auditors let down taxpayers by not
spotting problems at banks that had to be rescued in the financial crisis. The question arises as to
how soon will the competition authorities in South Africa conduct such a probe?
The World Bank conducted the second report on the observance of standards and codes –
accounting and auditing review in South Africa at the request of the Minister of Finance. In this
report it was suggested that there might not be a future for the small to medium size auditing firm
which includes the network firms.
The report states:
‘The SMPs that want to be competitive in the market place need to raise their professional
capabilities through expansion. It is worth noting that if an accounting firm is not a viable size, it is
difficult for that firm to continuously support enhancement of professional capabilities. Merger of
a number of SMPs and/or networking with a regional/international network of accounting firms
may be the most effective vehicle for SMP expansion in South Africa.’
Only nine of the 353 audit partners who signed off on financial statements of JSE-listed companies
were black African, and more than 90% were audited by a few firms. Bernard Agalhus - “We will
only see true empowerment when opportunities are provided equally amongst everyone,” If there
is no mandatory joint audits to facilitate transfer of learning the auditing profession will never
transform.
E.I. du Pont de Nemours & Company adopted a policy from 1910 onward of rotating its external
audit firm every year, and later every several years, until the 1950s, when it finally consented to
appoint a permanent auditor. This practice of audit firm rotation was exceptional, if not unique,
among U.S. companies. In a letter to Irenee du Pont, the company President, dated June 23, 1922,
Frank G. Tallman, a director, a member of the executive committee, and a longtime member of
the upper management of Du Pont, wrote as follows: Referring to the matter of policy of changing
auditors each year, I state this has been done in the past largely because Mr. P.S. du Pont favored
it and because the basic principle governing having auditors at all seems to indicate that the proper
result would be more fully obtained by changing auditors annually.
Du Pont’s policy of rotating audit firms, initially each year and then every several years, was
instituted so as to assure disinterestedness on the part of the auditor. Lammot du Pont believed
that the annual audit should be conducted by a firm that had no involvement with the company
during the immediately preceding year. He seemed especially concerned to prevent or expose any
collusion among officers, and even the external auditor was not above suspicion.
The unique Du Pont experience with audit firm rotation teaches a lesson today in view of questions
that have been raised about the celebrated instances of unduly congenial relations between
auditors and client companies that have been exposed in the media. One can almost argue that,
in some of these audit engagements, a state of virtual de facto collusion seemed to exist between
the auditor and the company.
If that is so, one can reflect on Du Pont’s concern of more than a half century ago that decisive
steps must be taken when setting the terms of the audit engagement to assure that the auditor
will assume a truly independent posture, which is not compromised by its partners developing
overly familiar ties with company officers or board members. Whether the rotation of the partners
assigned to the audit engagement will achieve the same result remains to be seen.
A further argument in favour of MAFR is that it will prevent ‘staleness’ resulting from ‘repetition
of earlier [audit] engagements and will lead to improved audit quality and audit integrity, as
rotation allows ‘fresh eyes’ to review the company’s financial statements and accounting
practices/policies as well as the previous firm’s audit.
9. Independence Components of an Audit
The independence of the auditor from the firm that he is auditing is one of the basic requirements
to keep public confidence in the reliability of the audit report. Independence adds credibility to
the audit report on which investors, creditors, employees, government and other stakeholders
depend to make decisions about a company. The benefits of safeguarding an auditors’
independence extend so far as to the overall efficiency of the capital markets.
Independence is described as:
• having a position to take an unbiased viewpoint in the performance of audit tests, analysis
of results, and attestation in the audit report;
• independentinfact:accountant’sabilitytomaintainanunbiasedattitudethroughout the
audit, so being objective and impartial;
• independent inappearance:theresultofothers’interpretationsofthisindependence.
• Independence in auditing means having a position to take an unbiased viewpoint in the
performance of audit tests, analysis of results, and attestation in the audit report. Since the
main product of attestation is the credibility added to financial information by the audit
report, it is essential that the auditor be independent and is perceived as such by the users
of audited financial statements.
Independence in auditing means having a position to take an unbiased viewpoint in the
performance of audit tests, analysis of results, and attestation in the audit report. Since the main
product of attestation is the credibility added to financial information by the audit report, it is
essential that the auditor be independent and is perceived as such by the users of audited financial
statements.
a. Independence in Fact and Appearance
Accountants must not only maintain an independent attitude in fulfilling their responsibilities, but
the users of financial statements must have confidence in that independence. These two
objectives are frequently identified as “independence in fact” and “independence in appearance.”
Independence in fact exists when the accountant is able to maintain an unbiased attitude
throughout the audit, so being objective and impartial, whereas independence in appearance is
the result of others’ interpretations of this independence
The IFAC ethics guideline states that independence requires:
• Independence of mind: The state of mind that permits the provision of an opinion without
being affected by influences that compromise professional judgment, allowing an
individual to act with integrity, and exercise objectivity and professional skepticism.
• Independence in appearance: The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party, having knowledge of all relevant
information, including safeguards applied, would reasonably conclude a firm’s, or a
member of the assurance team’s, integrity, objectivity or professional skepticism had been
compromised.
• Prior to accepting a new client or continuing with a current client the auditor must ensure
that the members of the auditor team meet the relevant independence requirements.
The steps an auditor must follow to ensure compliance with the independence requirements as
follows:
1. Procedures to check personal financial investments of partners and employees and the
business relationships with the potential audit client.
a. ISQC 1.24 - At least annually, the firm shall obtain written confirmation of compliance with
its policies and procedures on independence from all firm personnel required to be
independent by relevant ethical requirement.
b. It is generally accepted practice that the engagement team is required to sign a declaration
during the planning of the engagement file (or if the engagement team member joins at a
later stage, on the date when the engagement team member starts on the engagement
file). This declaration will evidence that they have complied with the independence during
an audit engagement.
i. This is to assist: ISA220.11 The engagement partner shall form a conclusion on compliance
with independence requirements that apply to the audit engagement.
and reputation by client companies who become aware of a major audit failure by an individual
audit partner inside the international network, as is commonly held to be the reason for the
collapse of Arthur Andersen in 2002.
A further risk might be an indictment or removal from a register in a major country harming the
brand of the entire network. John Fingleton, Chief Executive of the Office of Fair Trading in the
United Kingdom stated:
‘The market for large company audits lacks sufficient competition and does not work well for
customers. It is highly concentrated, largely supplied by four big firms, with clients rarely switching
between auditors. The barriers to entry for new and smaller competitors were too high. These are
not the indicators of a competitive market.’
London Economics also found that liability risks, combined with the very limited insurance
capacity, are barriers for major mid-tier firms seeking to enter the statutory audit market for large
companies listed on capital markets. As a consequence, there is a fear that the international audit
market for listed companies might not be sustainable over time. The United Kingdom has recently
extended its accounting competition probe. The probe focuses on whether the world's Big Four
accounting firms - KPMG, Deloitte, PricewaterhouseCoopers and Ernst & Young - are restricting
competition in Britain's audit market for the top 350 listed companies. The Competition
Commission faces pressure from politicians who believe that auditors let down taxpayers by not
spotting problems at banks that had to be rescued in the financial crisis. The question arises as to
how soon will the competition authorities in South Africa conduct such a probe?
The World Bank conducted the second report on the observance of standards and codes –
accounting and auditing review in South Africa at the request of the Minister of Finance. In this
report it was suggested that there might not be a future for the small to medium size auditing firm
which includes the network firms.
The report states:
‘The SMPs that want to be competitive in the market place need to raise their professional
capabilities through expansion. It is worth noting that if an accounting firm is not a viable size, it is
difficult for that firm to continuously support enhancement of professional capabilities. Merger of
a number of SMPs and/or networking with a regional/international network of accounting firms
may be the most effective vehicle for SMP expansion in South Africa.’
Only nine of the 353 audit partners who signed off on financial statements of JSE-listed companies
were black African, and more than 90% were audited by a few firms. Bernard Agalhus - “We will
only see true empowerment when opportunities are provided equally amongst everyone,” If there
is no mandatory joint audits to facilitate transfer of learning the auditing profession will never
transform.
E.I. du Pont de Nemours & Company adopted a policy from 1910 onward of rotating its external
audit firm every year, and later every several years, until the 1950s, when it finally consented to
appoint a permanent auditor. This practice of audit firm rotation was exceptional, if not unique,
among U.S. companies. In a letter to Irenee du Pont, the company President, dated June 23, 1922,
Frank G. Tallman, a director, a member of the executive committee, and a longtime member of
the upper management of Du Pont, wrote as follows: Referring to the matter of policy of changing
auditors each year, I state this has been done in the past largely because Mr. P.S. du Pont favored
it and because the basic principle governing having auditors at all seems to indicate that the proper
result would be more fully obtained by changing auditors annually.
Du Pont’s policy of rotating audit firms, initially each year and then every several years, was
instituted so as to assure disinterestedness on the part of the auditor. Lammot du Pont believed
that the annual audit should be conducted by a firm that had no involvement with the company
during the immediately preceding year. He seemed especially concerned to prevent or expose any
collusion among officers, and even the external auditor was not above suspicion.
The unique Du Pont experience with audit firm rotation teaches a lesson today in view of questions
that have been raised about the celebrated instances of unduly congenial relations between
auditors and client companies that have been exposed in the media. One can almost argue that,
in some of these audit engagements, a state of virtual de facto collusion seemed to exist between
the auditor and the company.
If that is so, one can reflect on Du Pont’s concern of more than a half century ago that decisive
steps must be taken when setting the terms of the audit engagement to assure that the auditor
will assume a truly independent posture, which is not compromised by its partners developing
overly familiar ties with company officers or board members. Whether the rotation of the partners
assigned to the audit engagement will achieve the same result remains to be seen.
A further argument in favour of MAFR is that it will prevent ‘staleness’ resulting from ‘repetition
of earlier [audit] engagements and will lead to improved audit quality and audit integrity, as
rotation allows ‘fresh eyes’ to review the company’s financial statements and accounting
practices/policies as well as the previous firm’s audit.
9. Independence Components of an Audit
The independence of the auditor from the firm that he is auditing is one of the basic requirements
to keep public confidence in the reliability of the audit report. Independence adds credibility to
the audit report on which investors, creditors, employees, government and other stakeholders
depend to make decisions about a company. The benefits of safeguarding an auditors’
independence extend so far as to the overall efficiency of the capital markets.
Independence is described as:
• having a position to take an unbiased viewpoint in the performance of audit tests, analysis
of results, and attestation in the audit report;
• independentinfact:accountant’sabilitytomaintainanunbiasedattitudethroughout the
audit, so being objective and impartial;
• independent inappearance:theresultofothers’interpretationsofthisindependence.
• Independence in auditing means having a position to take an unbiased viewpoint in the
performance of audit tests, analysis of results, and attestation in the audit report. Since the
main product of attestation is the credibility added to financial information by the audit
report, it is essential that the auditor be independent and is perceived as such by the users
of audited financial statements.
Independence in auditing means having a position to take an unbiased viewpoint in the
performance of audit tests, analysis of results, and attestation in the audit report. Since the main
product of attestation is the credibility added to financial information by the audit report, it is
essential that the auditor be independent and is perceived as such by the users of audited financial
statements.
a. Independence in Fact and Appearance
Accountants must not only maintain an independent attitude in fulfilling their responsibilities, but
the users of financial statements must have confidence in that independence. These two
objectives are frequently identified as “independence in fact” and “independence in appearance.”
Independence in fact exists when the accountant is able to maintain an unbiased attitude
throughout the audit, so being objective and impartial, whereas independence in appearance is
the result of others’ interpretations of this independence
The IFAC ethics guideline states that independence requires:
• Independence of mind: The state of mind that permits the provision of an opinion without
being affected by influences that compromise professional judgment, allowing an
individual to act with integrity, and exercise objectivity and professional skepticism.
• Independence in appearance: The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party, having knowledge of all relevant
information, including safeguards applied, would reasonably conclude a firm’s, or a
member of the assurance team’s, integrity, objectivity or professional skepticism had been
compromised.
• Prior to accepting a new client or continuing with a current client the auditor must ensure
that the members of the auditor team meet the relevant independence requirements.
The steps an auditor must follow to ensure compliance with the independence requirements as
follows:
1. Procedures to check personal financial investments of partners and employees and the
business relationships with the potential audit client.
a. ISQC 1.24 - At least annually, the firm shall obtain written confirmation of compliance with
its policies and procedures on independence from all firm personnel required to be
independent by relevant ethical requirement.
b. It is generally accepted practice that the engagement team is required to sign a declaration
during the planning of the engagement file (or if the engagement team member joins at a
later stage, on the date when the engagement team member starts on the engagement
file). This declaration will evidence that they have complied with the independence during
an audit engagement.
i. This is to assist: ISA220.11 The engagement partner shall form a conclusion on compliance
with independence requirements that apply to the audit engagement.
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