Boosting auditor independence in non-assurance services

Singapore

THE Institute of Singapore Chartered Accountants (ISCA) on Thursday unveiled a series of recommendations aimed at strengthening audit independence in relation to the provision of non-assurance services, a move that is welcomed by observers who say is a right step towards raising audit standards.

This comes as high independence standards are vital to maintain public confidence in audited financial information. But the provision of non-assurance services to audit clients have raised concerns over auditor independence in recent years, said ISCA in a press statement.

There is also a lack of clarity when it comes to how the independence of audit firms should be assessed.

Issues often arise from the involvement in revenue-generating domains such as corporate finance, management consulting and tax services, Lawrence Loh, associate professor at the NUS Business School and director of CGIO told The Business Times.

"While such involvement can be ring-fenced from assurance, the influence on auditor impartiality may be more indirect and subtle," he said.

Against this backdrop, ISCA recommended that approval should be obtained from those charged with governance before an audit firm can be appointed to carry out non-assurance services.

Currently, auditors only need to provide disclosure if the fees for non-assurance services provided exceed more than 50 per cent of the audit fees.

In addition, ISCA proposed that audit firms should obtain confirmation that the fees for non-assurance services earned by the network firm from each of the audit client's parent and sister companies do not exceed 1 per cent of the network firm's revenue.

This to address challenges in obtaining information on non-assurance services provided by network firms (of the audit firm) to upstream and sister entities.

If the fee for non-assurance services exceeds 1 per cent, either the audit firm or the audit firm's ethics and independence partner (or equivalent) has to provide those charged with governance a confirmation that there is no undue influence from network firms on the execution of the audit.

ISCA is also looking to refine the definition of "audit-related services" to narrow the scope of non-assurance services under the EP 100 Code of Professional Conduct and Ethics.

These services refer to non-assurance services that are closely related to the work performed in an audit and are carried out by the audit engagement team

Such "audit-related services" will therefore be excluded from the computation of the proportion of non-assurance services to audit fee, to better reflect the non-assurance services that could potentially affect auditor independence.

Observers BT spoke to said ISCA's recommendations are timely and critical in a time where there has been greater emphasis on audit quality.

Said Shariq Barmaky, regional managing partner of audit and assurance at Deloitte South-east Asia: "We are seeing an increasing focus on auditor independence and ISCA's recommendations are directionally aligned with what's happening in other regions.

"As appointment of auditors is by the board of directors and shareholders, transparency in non-assurance services provided to audit clients and controlled entities may help the company better assess auditor independence."

PwC Singapore's assurance leader Marcus Lam said: "Stakeholders are seeking confirmation and safeguards to ensure that there is no distraction to the audit process. The recommendations over the provision of non-assurance services by auditors will ensure that auditors stay focused and are welcomed."

Prof Loh said the recommendations are "clear steps in the right direction" but pointed out that short of totally splitting off the audit function from the accounting firms, the challenge of independence will always exist.

"There are indeed many shades of grey when determining the independence of audit firms such as in the stipulation of yardsticks on fee proportions or even whether disclosures are themselves enough as clearances to proceed," he said.

Meanwhile, PwC's Mr Lam said that there are "other important ingredients necessary to achieve a quality audit". This includes professional scepticism, good understanding of the auditees' business, good quality of audit professionals and robust audit processes.

The recommendations were also broadly welcomed by some 40 audit committee members who responded to an online survey sent out by ISCA on the proposed practices.

Said ISCA's chief executive officer Lee Fook Chiew in a press statement: "The survey findings show that audit committee members of Singapore companies are supportive of ISCA's recommendations to strengthen auditor independence in relation to the provision of non-assurance services.

"We will take the feedback into consideration when we work on enhancing the non-assurance services and fee-related provisions in ISCA's Code of Professional Conduct and Ethics to address the diversity in the interpretation and application of such provisions," said Mr Lee.