Threats To Auditor Independence

In the auditing profession, there are five major threats to auditor independence which may compromise an auditor's independence. Before outsourcing your audit needs, it is very necessary that all members of the audit team review these five threats. In the process of carrying out audit functions, the exposure of an auditor to a certain threat means he or she should either create safeguards to cut the threat to minimum level or resign from the audit engagement to stay on a safer side.

What is Auditor Independence?

Auditors are expected to give an unbiased and professional opinion on the work assigned to audit. An auditor who lacks independence literally renders their accompanying auditor report useless to those who rely on them to make decisions.

For example, assuming you are a potential investor in XYZ Company. If you know that the auditor for XYZ Company has a personal relationship with the CEO of the company, would you trust that the audited work is a fair and unbiased view of the company’s financial standing? Would you be sure that the auditor and CEO did not conspire to issue a favorable audit report?

The truth is that auditors without independence compromise the integrity of financial markets and the reliability of information for making decision. Investors would not be willing to extend capital to companies, knowing that an auditor who is not independent audited the company. Furthermore, banks would not be willing to grant loan for fear that the auditor might’ve provided a biased audit report.

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What are Threats to Auditor Independence?

The big question is "What can impair auditors independence? To answer this question, below are five threats to auditor independence that can potentially compromise auditor's independence.

1. Self-Interest Threat

A self-interest threat exists if the auditor holds a direct or indirect financial interest in the company or depends on the company for a major outstanding fee.

Example of self-interest threat

The audit team is preparing to carry out its 2020 audit for XYZ Company. However, the audit team has not received its 2019 audit fees from XYZ Company.

Issue

The audit team might be tempted to present a pleasing report to XYZ company so that the company can secure a loan to pay the outstanding fees for their 2019 audit.

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2. Self-Review Threat

There is self-review threat if the auditor is auditing his own work or work performed by colleagues in the same company.

Example of Self-Review threat

The auditor prepares the financial statements for XYZ Company while also working in ZYZ company as an auditor.

Issue

By having the auditor audit his or her own work, the auditor is not expected to form an unbiased view on the financial statements of the company.

3. Advocacy Threat

There is an existence of advocacy if the auditor is involved in promoting the client, to the extent the auditor's objectivity is compromised.

Example of advocacy threat

The auditor is helping in selling XYZ Company while also working as the company's auditor.

Issue

The auditor may present a favorable report to increase the worth of XYZ Company.

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4. Familiarity Threat

There is familiarity threat if the auditor has a close relationship to or too familiar with staffers, officers, or directors of the client company.

Example of familiarity threat

The audit of XYZ Company is done by the same auditor for more than 10 years and the auditor often plays snooker with the CEO and CFO of XYZ Company.

Issue

The auditor may have become very familiar with the client and, therefore, lacks objectivity in his/her report.

5. Intimidation Threat

Intimidation threat exists when the management or its board of directors intimidate the auditor to the point that the auditor is discouraged from acting objectively.

Example of intimidating threat

XYZ Company is not happy with the outcome of the audit report and threatens to change auditor the following year. Meanwhile, XYZ Company is the biggest customer of the auditor.

Issue

Auditor's independence is compromised, as XYZ Company is their biggest client and normally, they do not want to lose such an important client. Therefore, the auditor may present a report that appeases XYZ Company.

Threats To Auditor Independence

What is Auditor Independence?