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

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