Auditor independence and non-audit services - ICAEW

Table 3.1: Definitions and comments about independence from regulatory frameworksFramework Comments on independence Distinctions between independence of mind and independence in appearanceIFAC,AustraliaECUK(ICAEWethicalguide) 6The use of the word ‘independence’ on itsown may create misunderstandings. Standingalone the word may lead observers to supposethat a person exercising professional judgmentmay be free from all economic financial andother relationships. This is impossible as everymember of society has relationships withothers (IFAC, 8.9, Australia, principle 12).Independence is not an absolute standardwhich statutory auditors must attain, free fromall economic, financial and other relationshipsthat could appear to entail dependence of anykind. Such a state is manifestly impossible aseveryone has some dependency or relationshipwith another person (Annex A1).Threats to objectivity can be general in natureor relate to the specific circumstances of anengagement or appointment (1.200.2.6). Theeasiest way of avoiding such threats would befor members to decline to act in anycircumstances where the slightest threat toobjectivity might exist. This could deny toclients and employers proper access to amember’s breadth of expertise and knowledgeof the …business, and in deciding whether toinclude such a prohibition, the Institute alwaysbears in mind the need to maintain a balancethat respects the interests of clients andemployers and the possible wider publicinterest (1.201.1.6).Independence of mindThe state of mind that permits the provision of an opinion without being affected by influencesthat compromise professional judgment, allowing an individual to act with integrity, andexercise objectivity and professional skepticism (IFAC, 8.8, Australia, principle 14).Independence in appearanceThe avoidance of facts and circumstances that are so significant a reasonable and informedthird party, having knowledge of all relevant information, including any safeguards applied,would reasonably conclude a firm’s or a member of the assurance team’s integrity, objectivityor professional skepticism had been compromised (IFAC, 8.8, Australia, principle 14).Independence of mindObjectivity (as a state of mind) cannot be subjected to external verification, and integrity cannotbe verified in advance (1.2) The state of mind which has regard to all considerations relevant tothe task but no other (Annex A1).Independence in appearanceThe avoidance of facts and circumstances which are so significant that a reasonable andinformed third party would question the statutory auditor’s ability to act objectively (AnnexA1).Independence of mindIntegrity implies not merely honesty but fair dealing and truthfulness (1.201.01)Objectivity is the state of mind which has regard to all considerations relevant to the task inhand but no other. It is sometimes described as ‘independence of mind’ (1.201.02).Independence in appearanceMembers should therefore take into consideration the public interest and reasonable andinformed public perception in deciding whether to accept or continue with an engagement orappointment, bearing in mind that the level of public interest will be greater in larger entitiesand entities that are in the public eye (1.200.2.5) The term ‘public interest’ relates to matters ofpublic concern, not public curiosity (1.200.2.4).6 In June 2002 the ICAEW Council in the UK accepted the EC Recommendation as best practice from 1 October 2002 insofar as it differs from the existingICAEW framework. The best practice provision applies as an interim measure whilst the procedure for formal adoption by all the UK professional bodies isundertaken.15