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Hardld RING

Striving for Absolute Independence – Will the Prohibition of Non-Audit Services Result in Better Audits?. Hardld RING. Vice President, Institut der Wirtschaftsprufer Germany. Harald Ring President of the Institut der Wirtschaftspruefer, Germany. Striving for Absolute Independence

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Hardld RING

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  1. Striving for Absolute Independence – Will the Prohibition of Non-Audit Services Result in Better Audits? Hardld RING • Vice President, • Institut der Wirtschaftsprufer • Germany

  2. Harald RingPresident of the Institut der Wirtschaftspruefer, Germany Striving for Absolute Independence Will the Prohibition of Non-audit Services Result in Better Audits?

  3. Introduction (1) • Accountants: a profession that is bound to very strict ethical standards • Responsibility not limited to satisfy the client’s needs • Rather, acceptance of a particular responsibility to the public • Particularly, when accountants act as auditors • Today: new debate about auditor independence • Intensified by the Enron collapse and other accounting scandals • One key issue: Scope of services the auditor may provide to his audit client

  4. Introduction (2) • Opposing views as to the scope of permitted services • Far going prohibition of non-audit services (“audit- only approach”) • No general prohibition of non-audit services • Both approaches can be found in current rule sets

  5. Overview over the different rule sets (1) • IFAC Code of Ethics/EU Commission’s Recommendation on Auditor Independence • Principles-based approach • Catalogue of possible independence risks and safeguards to mitigate the risks • Individual evaluation of each audit engagement is needed • Amended by “specific circumstances” (examples how to apply the principles-based approach in frequently occurring situations where independence may be compromised)

  6. Overview over the different rule sets (2) • Provision of non-audit services • Permitted if general safeguards (independent of the specific service) and specific safeguards (dependent of the specific service) exist • Application illustrated for different kinds of services (e.g., preparation of accounts and financial statements, design and implementation of financial information systems, valuation services, …) • Prohibition of the service only as an ultimate safeguard

  7. Overview over the different rule sets (3) • Sarbanes-Oxley-Act in the U.S. • Eliminated the exceptions and conditions of Rule 2-01 of Regulation S-X which could result in the admissibility of a non-audit service • Uniformly prohibits the following services • Bookkeeping or other services related to the accounting records or financial statements of the audit client • Financial Information systems design and implementation • Actuarial services

  8. Overview over the different rule sets (4) • Appraisal or valuation services, fairness opinions or contribution-in-kind reports • Internal audit out-sourcing services • Management functions or human resources services • Broker or dealer, investment adviser, or Investment banking services • Legal services and expert services unrelated to the audit • Any other service that the PCAOB determines impermissible • Shift towards an “audit-only approach“

  9. Deficiencies of an “Audit-only Approach” (1) • Absolute versus relative independence • Legislators’ view: absolute independence as the ideal state that should be strived for • However, auditor independence as a concept of relative independence • Insufficient consideration of client-specific knowledge as the basis of today’s audit • Improving independence is not automatically equivalent to improving audit quality • Increasingly complex and rapidly changing business environment

  10. Deficiencies of an “Audit-only Approach” (2) • Non-audit services assist the auditor in obtaining the knowledge required for high-quality audits • Negative impacts on auditor quality and recruiting • Audit quality depends on auditor quality • Non-audit services assist the auditor in recruiting “high potentials” • Inseparability of audit and certain non-audit services • Lack of empirical evidence as to negative trade-offs between non-audit services and audit quality

  11. Conclusion • Non-audit services have the potential of impairing auditor independence and these risks must be eliminated • However, a general ban on a wide range of non-audit services is not an appropriate solution • Independence risks primarily depend on the circumstances of the individual case • Thus, an “audit-only approach” may remove “non-existent” independence risks, thereby encumbering audit quality • Rather, a flexible concept like the one pursued by the IFAC Code or the EU Recommendation is needed

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