The independence of a firm or an individual on the engagement team may be threatened if an officer or director of the assurance client or a related entity, or a person in a position to exert influence over the subject matter of the assurance engagement has been a member of the engagement team or a partner of the firm. Such circumstances may create a self-interest, familiarity or intimidation threat, particularly when a significant connection remains between the individual and their former firm or colleagues of the former firm.
The significance of the threat depends upon several factors including:
- the position the individual has assumed at the client and whether the position exerts significant influence over the subject matter of the assurance engagement or the financial statements subject to audit or review by the member or firm;
- the amount of any involvement the individual will have with the engagement team;
- the length of time since the individual was on the engagement team or with the firm; and
- the former position of the individual within the engagement team or firm.
The significance of such a threat should be evaluated and, if it is other than clearly insignificant, available safeguards should be applied to reduce it to an acceptable level.
For clients that are reporting issuers or listed entities, Rule 204.4(16)(a) prohibits a firm from performing an audit engagement for that client if a member of the firm’s audit team accepts employment with the client in a financial reporting oversight role within one year from the date when the financial statements were filed with the relevant securities regulator or stock exchange.
Rule 204.4 (16) A member or firm shall not perform an audit engagement for a reporting issuer or listed entity if:
- a person who participated in an audit capacity in an audit of the financial statements of the entity performed by the member or firm is an officer or director of the entity or is in a financial reporting oversight role unless a period of one year has elapsed from the date that the financial statements were filed with the relevant securities regulator or stock exchange; or
While there are no prohibitions to prevent an audit team member from going to work for a client, a member being offered such employment should review the rules and discuss the possible consequences with the engagement partner and client prior to accepting such employment. Rule 204.7(b) requires members (or students) on an assurance engagement team to advise the engagement partner of any interest, relationship or activity that would preclude the person from being on the engagement team.
Rule 204.7 Members or Students Must Disclose Prohibited Interests and Relationships:
- A member or student who has a relationship or interest, or who has provided a professional service, that is precluded by this Rule shall advise in writing a designated partner of the firm of the interest, relationship or service.
- A member or student who has been assigned to an engagement team for an assurance client shall advise, in writing, a designated partner of the firm of any interest, relationship or activity that would preclude the person from being on the engagement team.
In addition, although the prohibition is specific to a listed entity or reporting issuer, an actual or perceived threat to independence may still exist when the client is not a listed entity or reporting issuer. Thus it would be prudent for firms and their staff members to evaluate the significance of any independence threat and, if the threat is other than clearly insignificant, identify and apply safeguards to reduce the threat to an acceptable level. Where safeguards are not available to reduce the threat to an acceptable level, the member or firm should consider the situation, and the acceptance or continuance of the engagement. File documentation discussing the consideration of threats, safeguards, and the ultimate conclusion can prove valuable for file reviewers in understanding the decision made.
Other rules that should be considered include Rule 204.1 and Rule 204.3 as they relate to independence for assurance and specified auditing procedures engagements and Rule 204.8 as it is ultimately the firm’s responsibility to ensure compliance.
204.1 Assurance and Specified Auditing Procedures Engagements
A member or firm who engages or participates in an engagement:
- to issue a written communication under the terms of an assurance engagement; or
- to issue a report on the results of applying specified auditing procedures; shall be and remain independent such that the member, firm and members of the firm shall be and remain free of any influence, interest or relationship which, in respect of the engagement, impairs the professional judgment or objectivity of the member, firm or a member of the firm or which, in the view of a reasonable observer, would impair the professional judgment or objectivity of the member, firm or a member of the firm.
204.3 Identification of Threats and Safeguards:
A member or firm who is required to be independent pursuant to Rule 204.1 shall, in respect of the particular engagement, identify threats to independence, evaluate the significance of those threats and, if the threats are other than clearly insignificant, identify and apply safeguards to reduce the threats to an acceptable level. Where safeguards are not available to reduce the threat or threats to an acceptable level, the member or firm shall eliminate the activity, interest or relationship creating the threat or threats, or refuse to accept or continue the engagement
204.8 Firms To Ensure Compliance:
A firm that performs an assurance engagement shall ensure that members of the firm do not have a relationship or interest, do not perform a service and remain free of any influence that would preclude the firm from performing the engagement pursuant to Rules 204.1, 204.3, 204.4 or 204.9.
CPA Canada has issued a “Guide to Canadian Independence Standard” (2016). The Guide contains explanations, examples and frequently asked questions intended to provide assistance in understanding and applying the independence standard.