What are possible threats to the independence of auditor?
One of the responsibilities of the professional institutes is that they are responsible for the code of Professional Conduct.
So as you could imagine those standards that are pretty general such as the principles of Professional Conduct which basically.
So they put out the code of Professional Conduct which guides the professional conduct of CPAs and so for CPAs the code of Professional Conduct.
It's if they violate the code of Professional Conduct there can be actions taken against them but it's a framework for which they are to adhere to.
So you it may go the code goes from very general standards to very specific standards.
says these are the ideal behaviors and attitudes that an auditor should have are somewhat more difficult to enforce.
They're not enforceable because think about it it's ideal attitudes and behaviors right so in one of the things.
You struggle with for example you say things like auditors should exhibit.
You know an appropriate amount of professional skepticism well you only have the hindsight to kind of really determine and then its professional skepticism.
And actually, I was just on a conference call a day because I'm on this the PCAOB has all of these research synthesis teams.
That they've kind of come to the academic community and say you know we want to get more information we want to know.
And you know we want to know more about what's going on and you guys do research so we want you to help us out with this.
And so I'm on a team that's looking at professional skepticism and one of the things.
What we're finding as we're looking through the literature is that it's kind of all over the place in terms of what are the risks.
And professional staff what when our auditors are not sufficiently skeptical what does that mean that they're not skeptical do.
They even know that skeptical it's got this ISM at rate is it something that's learned.
So you know we're looking it's a very difficult concept so you'll see sometimes if you read an inspection report.
It'll say through our inspection reports a lack of professional skepticism auditors didn't exhibit an appropriate amount of professional skepticism.
There was an audit failure because there wasn't professional skepticism well that's very general and what they're going on is.
These you know they're using the auditor's behavior was due to a lack of professional skepticism.
So it would be very difficult to enforce if at all rules of conduct are the men of minimally acceptable standards so….!!
we'll have rule 101 and it has very clear standards about what auditors should and should not do so those are the bright lines.
And we talked about independence and appearance you could look at the rules and see the order to meet the criteria under the rules.
Yes, he did or she did or no she didn't so they're specifically enforceable then.
There are interpretations of the rules of conduct as well as ruling 5 the professional ethics Executive Committee.
And these are not specifically enforceable but departures have to be justified so they're really in there's a rule so.
FOR
EXAMPLE;
let's say
under the rules of conduct order to depart from Max and they try to provide
justification.
And so why
they departed and the justification might be reasonable it might indicate an
exception to the rule.
So these are
these within that would become an interpretation of the rule so these are
basically answers to questions.
Regarding
the rules of conduct and then rulings by the professional ethics committee the
same thing.
It's not that is looking at mitigating circumstances or maybe unique situations basically overall the principles of Professional Conduct.Deal with responsibilities the Public Interest integrity which you will hear a lot of with respect to auditing as you read standards.You will see that word uses a lot of objectivity and independence same things over and over again.
You're going
to see that the use of that word does care and then the scope and nature of
services.
So basically it is the responsibility of members auditor or CP to exercise sensitive and moral judgments and all activities they have to remember.They're asking in the public interest and if they respect that in honor that and recognize that.
They're serving the public that they have integrity for all of their images with respect to performing their responsibilities.They have to be able to think about how if there's an audit failure what the reaction is by the public.
When there's
a significant artist failure in the public there's this whole lack of public
confidence after.
You saw the
failures of Enron and the world come injustice a series of counting failures and
auditing failures.
We thought about what kind of opinion the public had about the public accounting profession or about CPAs' objectivity.And Independent members should be objective independent and free of conflict of interest so the more enforceable rules.
That you can that are for example with respect to independence and appearance.And see you can't have a direct interest in your client okay there are services that are prohibited that an auditor can't perform for their client.
So there it is for their audit client ok so there's an audit client you can't perform their number of consulting services.You cannot perform and there are many services for which the CPA is eligible but it all totally depends upon eligibility criteria.