The Impact of Ethics on Acceptance and Continuance Decisions
When looking at the topics addressed in investigation matters referred to the IRBA Enforcement Committee and matters referred to the IRBA Legal Department for disciplinary hearings, there is a concerning trend: in many cases, auditors and audit firms do not pay heed to the relevant ethical requirements and their impact on acceptance and continuance decisions.
Clients that are not public interest entities
It is often the case that auditors and audit firms provide various non-assurance services to clients prior to acting as their auditor, such as accounting and bookkeeping services, taxation services, consultancy services and agreed-upon procedures.
The IRBA Code of Professional Conduct for Registered Auditors (Revised April 2023) (IRBA Code) includes the following requirements and guidance:
• Para R400.31 states that, if an entity becomes an audit client during or after the period covered by the financial statements on which the firm will express an opinion, the firm shall determine whether any threats to independence are created by:
a. Financial or business relationships with the audit client during or after the period covered by the financial statements, but before accepting the audit engagement; or
b. Services provided to the audit client by the firm or a network firm in prior financial statement periods.
• Para 400.31 A1 of the IRBA Code explains that threats to independence are created when a non-assurance service is provided to an audit client during, or after the period covered by the financial statements, but before the audit team begins to perform the audit, and the service would not be permitted during the engagement period.
• Para 400.31 A2 of the IRBA Code further explains that a factor to be considered in such circumstances is whether the results of the service provided might form part of, or affect the accounting records, the internal controls over financial reporting, or the financial statements on which the firm will express an opinion.
Para 400.31 A3 of the IRBA Code provides examples of actions that might be safeguards to addressing threats to independence.
According to Para 400.31 A4 of the IRBA Code, a threat to independence created by the provision of a non-assurance service by a firm or a network firm, prior to the audit engagement period, or prior to the period covered by the financial statements on which the firm will express an opinion will be eliminated or reduced to an acceptable level, if the results of such service have been used or implemented in a period audited by another firm.
Depending on the nature and extent of the non-assurance services provided, if the audit engagement partner is also the person that signed off on the non-assurance services, the threat to independence may be too significant to accept the audit engagement.
The auditor and audit firm must pay heed to the IRBA Code requirements and guidance by implementing adequate safeguards. There should be separation between the individuals performing the non-assurance services and the audit engagement team.
Clients that are public interest entities
If the client is a public interest entity, the requirements are stricter. Not only the engagement teams, but also the entire firm and network firm are forbidden to provide such non-assurance services.
Para R400.32 of the IRBA Code states that a firm shall not accept an appointment as auditor of a public interest entity to which the firm or the network firm has provided a non-assurance service, prior to such appointment that might create a self-review threat, in relation to the financial statements on which the firm will express an opinion, unless certain conditions are met.
Para 400.32 A1 explains some of the actions that might be regarded by a reasonable and informed third party as eliminating, or reducing to an acceptable level any threats to independence created by the provision of non-assurance services to a public interest entity, prior to appointment as auditor of that entity.
Companies that require a statutory audit, in terms of the Companies Act
Apart from the IRBA Code requirements and guidance, auditors and audit firms must also consider compliance with the requirements of Section 90(2) of the Companies Act for statutory audits, in order to determine whether the auditor and audit firm are eligible to be appointed as auditor. If the auditor and audit firm fall foul of the requirements of Section 90(2), the audit engagement cannot be accepted.
Section 90(2) of the Act expressly disqualifies an auditor from being appointed to perform an audit, if that person provides, or has provided in the last five years, certain prohibited services or functions to the company.
Further guidance on the interpretation of the types of prohibited services is available in the IRBA/SAICA Guidance on the Provision of Non-audit Services by the Auditor of a Company (Section 90 of the Companies Act).
In summary
Auditors and audit firms must thoroughly consider relevant independence requirements from the IRBA Code and the Companies Act, prior to accepting audit engagements.
References
1. ISA 402, Audit considerations relating to an entity using a service organisation
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