Auditor independence and non-audit services - ICAEW

PART 2CURRENT REGULATORY FRAMEWORKSCHAPTER 3AUDITOR INDEPENDENCE AND NAS: ANALYSIS OF CURRENTREGULATORY FRAMEWORKS3.1 IntroductionIn order to protect auditor independence, regulatory frameworks in various countries laydown regulations which auditors are expected to observe. These regulations may be set inlegal or professional frameworks, and be rule or principles based depending on thecountry specific culture and environment.In this chapter we review the provisions contained in key current regulatory frameworksconcerning independence generally and the provisions specifically relating to non-auditservices. We also briefly consider the position in relation to the audit of the smallercompany. This review covers current regulatory frameworks in the UK (ICAEW, 1997,2001b), the US (SEC, 2000), Ontario (ICAO, 2002) and Australia (ICAA, 2002) and twoother significant and recently developed frameworks from the European Commission(EC, 2002) and International Federation of Accountants’ Code of Ethics for ProfessionalAccountants (IFAC, 2001). For ease of reference these documents are henceforth referredto as, UK, SEC, Ontario, Australia, EC and IFAC frameworks.3.2 Regulation of auditor independenceAn interesting conceptual framework for the regulation of auditor independence isoffered in a staff report by the now defunct US Independence Standards Board (ISB,2001), 5 which also recognises that independence is a matter of degree and identifies anddiscusses three basic principles for regulating auditor independence:• considering the level of independence risk and assessing its acceptability;• considering benefits and costs; and• considering the views of investors and other interested parties.Independence risk is considered to be the likelihood that an auditor’s objectivity wouldbe compromised or would appear to be compromised to well informed investors orothers. Decision makers should consider the level of independence risk by analysingthreats and their significance, assessing whether the level is acceptably low and applyingappropriate safeguards if it is not. The benefits of reduced risk should not exceed thecosts and the views of investors and others with an interest in financial reporting shouldbe taken into account when considering the level, acceptability and cost of independencerisk.5 The US ISB was set up in 1997 and, rather surprisingly, disbanded in 2001. The conceptual frameworkwas issued as a staff report but was never considered or adopted by the ISB.13