Canada Develops Principles-Based Independence Standard
The Canadian Institute of Chartered Accountants (CICA) has proposed a new kind of standard that would provide a systematic, principles-based framework for analyzing auditor independence.
The CICA is optimistic that its 68-page proposed standard will eliminate the problems associated with rules-based independence codes like those used in the U.S. Instead of following detailed rules, auditors and other assurance providers will be required to identify the threats to their independence, assess the significance of the threats, and apply safeguards to eliminate or reduce threats that are not clearly insignificant.
Specifically, auditors will be instructed to watch for five types of threats: self-interest threats, (e.g., when the auditor's firm depends too heavily on fees from the company and fears losing the work), self-review threats, (e.g., when the auditor's firm provided separate services relating to preparation of the financial statements), advocacy threats, (e.g., when an auditor acts on the client's behalf in a legal dispute), familiarity threats, (e.g., when an auditor has been involved with the company too long), and intimidation threats, (e.g., when a client company puts pressure on the auditor to cut fees and do less work than is needed.)
CICA's committee worked on the proposals for more than a year, partly in response to the Enron collapse. According to media accounts, the CICA has reported that major firms have agreed to begin applying the new standards to audits of publicly listed companies by the end of this year.
Download the exposure draft. Comments are due by Oct. 31, 2002.
-Rosemary Schlank
Tax OUT and internal audit IN
Based on the summary independence principles, public accountants would not longer be allowed to do the tax returns for their audit clients, because this results in (1) self review and (2) advocacy in relations to the government.
On the other hand, performing internal audit services for external audit clients would not break any of the 5 principles of independence.
This is totally contrary to current practice, but would be far more logical. However, I doubt that these principles will be sufficient to make audit firms give up lucrative tax advisory and compliance services to their audit clients. Some rules (or at least binding interpretations of the principles) will still be required in the future.
CICA proposal follows IFAC Code
Readers should be aware that the CICA proposal very closely mirrors the Code of Ethics for Professional Accountants issues in November, 2001 by the International Federation of Accountants (IFAC). Like the IASB, IFAC is trying to formulate an international standard for countries to adopt or at least emulate.