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| January, 2004 | The
Monthly Newspaper of the NYSSCPA |
Vol.
7, No. 1 |
Independence Is the Cornerstone of the CPA Profession
Practitioners Must Consider All Aspects of the Engagement
By Ian J. Benjamin
Independence is perhaps one of the most important attributes of the public accountant.
When a CPA issues an opinion on a company’s financial statements, interested readers expect the statements to present an unbiased picture of the company. Banks deciding whether to grant loans and investors deciding whether to buy or sell securities make use of the financial information in those statements. These and other users of financial statements expect the accounting profession to maintain the independence of auditors.
There are at least three elements of professional independence:
First and foremost are the various codes of professional conduct promulgated by state societies, the American Institute of CPAs (AICPA) and state licensing boards. The Web sites of the AICPA and the New York State Society of CPAs have pages devoted to ethics and rules of professional conduct, which should be periodically reviewed.
Second is the state of mind of the practitioner. An auditor may have satisfied professional codes of conduct on independence, but may still feel a bias with regard to a client. For instance, perhaps the auditor transacted business with the audit client in the past. Or perhaps the ramifications of the audit would affect the community, such as a client bankruptcy that could harm the local economy. While an auditor may be professionally independent, he must also consider whether he is intellectually independent.
Third is the auditor’s appearance to outsiders and third-party users of financial statements. The auditor may be intellectually independent, but will the public accept him as independent if there are circumstances in which reasonable people could infer that his independence was compromised? For example, the extent and nature of other services provided to an audit client may cause concerns about independence.
Members of an auditor’s family can also affect independence. For example, one partner in a CPA firm has a sister who becomes the bookkeeper of one of the firm’s clients. This client is a nonprofit organization that has been audited by the firm for a considerable length of time, during which a rewarding professional relationship has developed. The firm has gained prestige for having the nonprofit as a client. Understandably, the firm does not want to give up this particular audit client. The partners therefore reason that if the partner with the employed sister distances himself from the engagement, the firm will still be able to maintain its independence.
The Society’s Code of Professional Conduct (for specific language, please see the adjoining sidebar) uses the engagement-team approach to independence and may not define this relationship as one where independence is impaired if the partner whose sister is the bookkeeper has not and will not be part of the attest function team of the client, and if his involvement within the firm is part of a separate office from the partner participating in the audit. The size and structure of the firm is going to be key in resolving this issue: In a large accounting firm this criterion may be met, but in a two-partner firm, could one partner really be distant enough from his partner, even if there were two distinct offices?
And what about the state of mind of the partner in charge of the audit? Would that partner’s independence be conflicted because his partner’s sister is the bookkeeper? Only he can answer that question. An outsider, such as a contributor or customer, may reason that the audit firm is not independent. Similarly, a major lender to the organization or some other third-party user of the audited financial statements may reach the same conclusion.
The New York State Education Department’s (SED) Regents Rules also address the independence impairment issue. Specifically, Part 29.10-5 of the Special Provisions for the Profession of Public Accountancy, “Unprofessional Conduct in the Practice of Public Accountancy,” includes as a violation a CPA who “expresses an independent opinion or knowingly permits his or her firm to express an opinion on financial statements of…a for-profit or a not-for-profit enterprise, if the licensee, or a partner or employee of the firm is not independent with respect to the enterprise. Independence will be considered to be impaired if the licensee, a partner of the firm, or a member of his or her (the licensee’s) or the partner’s immediate family, is or has been a director or officer of the enterprise, or is or has been involved in any situation creating a conflict of interest, during the period covered by the examination or at the time of issuance of a report.”
The SED’s Regents Rules do not follow the engagement-team approach and may suggest that the partner-sister situation is one in which independence is impaired. “Immediate family” is not clearly defined, and any action in this matter may allow that definition to include the partner’s sister. The sister’s functioning as the organization’s bookkeeper could be interpreted as creating a conflict of interest, especially if her duties within the organization include high levels of accountancy, reconciliation and financial statement preparation.
In situations when the question of impairment is not clear, a CPA may be wise to err on the side of prudence and decline an audit engagement.
Ian J. Benjamin, a managing director with American Express Tax and Business Services Inc., is chair of the NYSSCPA’s Professional Ethics Committee.
