When it comes to independence and objectivity, vigilance pays

This article was current at the time of publication.

Independence and objectivity are not new concepts but ones that public practitioners often get wrong, overlook, or ignore, says Liz Stronge, Audit and Assurance Manager at Moggs Accounting and Advisory, Victoria.

Awareness of tricky issues or conflicts of interest is crucial to maintain public trust in financial reporting and auditing. It ensures that information is reliable and transparent.

“It can also be a great marketing tool because it creates a business where people identify that your practice respects the independence rules and will undertake work for their business in the same professional manner,” notes Stronge.  

Nicola Hankinson, National Technical Director for Baker Tilly Staples Rodway New Zealand, adds that maintaining professional independence and objectivity can prevent the tarnishing of a business’ reputation, as well as helping to avoid censure and potential penalties.

Inappropriate requests – maintaining objectivity

If you practise in a location where you are likely to run into clients socially, you may find yourself being asked to give after-hours advice about any number of financial subjects. This could happen at sporting events, or even when out with friends or family. 

In office hours, small practitioners may also be asked to take on work outside their professional scope. 

“As professionals we are bound by the requirements in ASQC 1, APES 320, APES 110, the Ethical Rules and Independence Guidelines,” says Stronge. 

“We can be brought to account professionally for not taking these into consideration. 

“However, the client has no such professional obligations and may think nothing of engaging in a discussion of matters in a pub or restaurant or requesting information based on ‘water cooler discussions’, making requests for services outside the scope of works or creating undue pressure to produce certain results.”

How you approach new business is certainly something you should make clear initially, to provide guiding posts for clients, she says. 

“Proprietary paperwork is key, as is valuing your own skills and profession.”

When relationships break down

In a regional setting, there is still the demand for clients to have their accounting services as a one-stop shop for all their business requirements, says Stronge. 

“This can present an independence challenge because you are providing several services as part of one firm, for example, giving advice to one partner on a retirement package proposal and then succession planning for the remaining partners in the business.”

However, this is not the only issue smaller firms are likely to face.

Relationship or intergenerational breakdowns, where an accountant has been dealing with all members of the family, require a practitioner to consider the ethical rules of objectivity, professional competence and confidentiality as well as the boundaries of their service.

“Some of this can include a threat to self-interest where fees are left outstanding by one or both partners in a financial stand-off,” says Stronge. 

“An accountant may find themselves in the position of a counsellor.”

One way to manage this potential conflict of interest is to bring in a third party, such as a lawyer or a financial adviser, to ensure there is another level of advice, she suggests. 

Hankinson says conflicts of interest can also arise when an accountant is dealing with both the vendor and buyer of a business, or with two clients in the same industry.

“It’s also important for accountants to ensure that any financial interests that may interlink with clients are appropriately managed,” she says. 

“In some instances, for example, this could involve requiring staff to sell shares held in companies.” 

The third-party test 

In these cases, and in practice more broadly, it is always important to go back to our profession’s code of ethics, says Hankinson. 

“If you are in any doubt about whether this is a breach of ethics, apply the reasonable and informed third party test – what would someone else think if they knew the facts and circumstances? Would they think you behaved in an ethical and reasonable way?”

“Always inform all parties of the conflict [of interest] you have identified and the safeguards you have put in place to manage the situation,” she says. 

“All parties must be comfortable with the arrangement. That agreement should always be formalised in a professional engagement letter.”

Further down the track, it is imperative to review the situation and apply the third-party test, she says. “It’s not a case of set and forget. Keep in mind that things change.”

The tricky area of audits

In audit firms, pressures from partners to maintain client relationships or meet financial targets can influence audit decisions and compromise independence.

Dependency on client fees for a significant portion of revenue can also increase reluctance to issue unfavourable audit opinions, while accepting limitations on the scope of an audit can undermine independence. 

Adds Stronge: “One of [the] grey areas … is the offering of audit insurance. When you’re selling a product that is protecting your revenue base, you’re insuring your own error rate essentially.”

For Australian practitioners, it’s also worth noting that audit is under the regulator microscope, with the  Australian Securities and Investments Commission (ASIC) recently announcing a new audit ethics and independence review.