More on the Familiarity Threat and Ethics Rules Violations

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In my last blog, I discussed the AICPA’s Conceptual Framework for Independence Standards and Guide for Complying with Rules 102-505. Among seven identified threats to independence and other ethics rules, the familiarity threat may be one of the most important. Here is an example from my personal experience.

Working for an international CPA firm, I supervised a director’s examination of a small bank for the last two of the five years the engagement was performed by the firm. I liked the bank’s three employees and quickly developed a personal relationship with them. Our engagement team found very few deficiencies or circumstances to include in our agreed-upon procedures report. In fact, we were amazed at the quality of employees work. For example, we had no exceptions to notes and deposit confirmations and their loan files were perfect!

Shortly after our last visit, however, a bank director discovered two complete sets of bank records indicating most of the bank’s assets were missing, and had been missing for nearly ten years! A subsequent review of our last examination by firm partners and legal counsel revealed a few findings that may have been clues to the potential fraud. Our team failed to recognize the clues mainly because of our familiarity with the bank’s personnel.

Because of our personal relationships with bank employees, our level of professional skepticism inadvertently decreased. We applauded the bank employees work in maintaining perfect loan files instead of asking ourselves, “How could loan files be perfect?” Excessive familiarity through long client associations can influence our evaluations of observations of engagement circumstances and audit findings. Extra “due professional care” must be employed on audits performed by the same CPA firm personnel over a number of years!

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