Advice & Best Practice

Finding the route to auditor independence

Accounting firms have long understood the importance of demonstrating auditor independence, both in reality and in perception. It is well known that an audit firm must establish and maintain independence when taking on an audit client, by ensuring that the firm does not provide prohibited non-audit services while performing an audit for a client. For global accounting firms, this independence requirement, while both necessary and useful, can be daunting to establish largely owing to the unique nature of global accounting member firm networks.  

In addition to this, auditor independence has recently received extra scrutiny under recent EU directives and the UK Competition and Market Authority’s recent auditor recommendations, including joint audits,  will more than likely lead to increasing amounts of audit work for large non-Big Four firms  or “challenger firms.” These firms will soon need to perform independence checks even faster as they become eligible for much more business. As the number of eligible engagements substantially increases, these challenger firms will need more global visibility of data across the firm, in order to check conflicts quickly and efficiently avoid losing out on business. Indeed, the UK Competition and Markets Authority report noted: “Three firms declined to tender due to ‘being unable to confirm their independence under the new EU directive on audit independence’”.

Global accounting networks enable firms to boast a global presence and service clients worldwide while providing local expertise. While each member firm is obligated to abide by certain by-laws of conduct and operations, each one operates largely independently of the global head office as well as its fellow member firms. This is good for autonomy, but bad for ensuring global independence. When one member firm is evaluating a potential audit client, that firm must reach out to all the other member firms via manual processes such as email, phone or a check of several disparate databases. This proves time-consuming and risky as any manual process increases the chance of human error.

A way to combat this is through the implementation of a global system that encompasses a centralised database, standardised search processes and well-defined workflows. A global system enables member firms to submit their client information to a centralised database so it can be updated periodically to ensure client data is up to date, cleansed, and easily searchable. Then, when a member firm is evaluating a potential client, that member can use the global system to run a search and receive ‘hits’, or potential conflicts, and then work to either clear the conflicts, apply safeguards if appropriate, or make the decision to not proceed with the business. This global system is the key to this end-to-end process.  

As challenger firms receive more opportunity to grow their business, they must develop the capability to efficiently carry out independence checks and minimise their risk of missed conflicts while doing so.  A centralised global database is key to this objective and to ensuring auditor independence as it garners increasing scrutiny by regulators in the UK and worldwide.

By Jey Purushotham, Senior Product Manager at Intapp

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