Auditor independence and non-audit services - ICAEW

Provision of some of these services could provide a real or perceived threat toindependence in the case of an audit client. The principal threats which arise from theprovision of NAS are:• self interest: the increase in economic dependence;• self review: taking management decisions and auditing one’s own work;• advocacy: acting for the client’s management in adversarial circumstances;and• familiarity: becoming too close to the client’s management through the rangeof services offered.Intimidation is the only one of the five threats which does not obviously arise from theprovision of NAS. NAS is therefore a wide ranging threat to independence. Table 3.2shows how the regulatory frameworks we have reviewed address these threats andrecommend how they should be managed. (We have not included Ontario in this tableas there is insufficient detail to make meaningful comparison with the others.) In thetable we have classified the guidance (or rules) on the various activities into fivecategories:• no: an absolute prohibition;• normally no: prohibited except in very limited or exceptional circumstances;• no if material: permitted if the figures involved are not material to thefinancial statements;• caution: requires the threats and safeguards for each case to be consideredbefore proceeding;• yes: permitted without restrictions; and• no specific guidance: where the service is not specifically referred to in therules or guidance.None of the frameworks offers guidance on all the types of services identifiedthroughout. It is also possible that there are services being provided or developed bythe firms which are not picked up by any framework where guidance may be needed.In all frameworks except SEC, which is rule based, the absence of reference to aspecific activity (i.e. our classification of no specific guidance) is of limitedsignificance because, in theory, all activities should be swept up by the over-ridingprinciples. The position with SEC is less certain as the principles set out in SEC arenot actually part of the rules.IFAC is the most comprehensive. Australia is almost identical to IFAC and wasadopted after the comprehensive review of independence in the Ramsay Report(2001). ICAEW was developed in 1997, and being rather older, is less explicit in anumber of areas than the more recently developed frameworks. ICAEW explicitlyrecognises the possibility of advocacy being a threat in respect of taxation services.SEC has more restrictions and shows the least flexibility. There are no instances inSEC of caution i.e. where professional judgment about the balance of threats andsafeguards is recommended. SEC reflects the more rule-based environment whichexists in the US. There are some interesting differences between the frameworks. SECimposes more restrictions on internal audit. EC and SEC impose more restrictions oninstallation of financial information technology systems, whereas the others permitproceeding with caution.20