Audit independence critical for ‘mitigating business risks’
Independent auditors will play an increasingly valuable role for businesses in coming years in helping businesses address compliance, legal and reputational risks, says a specialist auditor.
Engaging an independent auditor can help boost the performance of businesses and identify potential risks, according to Reliance Auditing Services managing director Naz Randeria.
Ms Randeria said that using an auditor means that the business has had its financials thoroughly checked by a fresh set of objective eyes, and any concerns or potential issues are identified and can be rectified.
“Failing to have a truly independent auditor can potentially result in increased compliance risk, potential legal liability and even the possibility of a loss of trust from customers and shareholders,” she said.
Ms Randeria says an Auditor not only needs to be independent of mind to ensure professional judgement is not compromised, but businesses should also ensure their Auditor is independent of appearance.
“This is essentially the ‘pub test’. Would a reasonable person conclude that professional scepticism has been compromised because of how a relationship appears from the outside?” she stated.
“For example, if I were to be on a board of a company, and yet a partner in my firm was providing audit services to that same company, how might that be perceived by others? Would it give the appearance that independence may be compromised?”
The use of an independent auditor also presents an opportunity for growth within the business.
“An independent auditor is better positioned to identify material misstatements and potential unprincipled activities,” said Ms Randeria.
Without any conflict of interest, auditors, she said, can conduct their assessments with an objective mindset, examining financial records and transactions with a critical eye and provide valuable feedback in areas where improvement is required.
“This vigilance is vital for ensuring that financial statements accurately represent the financial position of the company,” said Ms Randeria.
“A good, independent auditor can improve performance by identifying areas for improvement and efficiency, which can potentially benefit the business overall.”
The Accounting Professional and Ethical Standards Board (APESB) 110 Code of Ethics outlines the required independence guidelines, but Ms Randeria says businesses should also consider a range of other factors when engaging an auditor.
Businesses may want to think about what other services the auditor provides, for example.
“If your auditor also provides tax or other financial services to your company such as preparing reports, there is a potential for conflicts of interest to arise, even if carried out by different departments or individuals,” she said.
It is also best to avoid using close contacts such as a relative or close friend as an auditor to avoid the threat of familiarity and ensure independence.
Businesses should also check if their auditor has recently undergone a compliance review and what the outcome was.
“Were they required to make improvements or did they have conditions imposed on their registration?” she questioned.
It’s also important that the auditor doesn’t have a financial interest or capacity to make financial decisions in the company, including owning any shares for example.
While Reliance Auditing specialises in superannuation audits, Ms Randeria said the notion of independence is likely to become more critical in other sectors, particularly as Environmental Social Governance (ESG) reporting requirements continue to increase.
Prior to the release of the latest International Sustainability Standards, ASIC’s Chair Joe Longo flagged ESG as driving the biggest disclosure changes in a generation for sustainability requirements and climate-related financial disclosures.
“It will once again highlight the importance of having a truly independent auditor, to ensure compliance and complete transparency,” said Ms Randeria.
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