1. The IESBA Code of Ethics
Auditors must maintain strict ethical standards to protect public trust. The International Ethics Standards Board for Accountants (IESBA) Code establishes five fundamental core principles:
- Integrity: Being straightforward and honest in all professional relationships.
- Objectivity: Not allowing bias, conflict of interest, or undue influence of others to override professional judgments.
- Professional Competence and Due Care: Maintaining professional knowledge and skill at the level required to ensure a client receives competent professional service.
- Confidentiality: Respecting the confidentiality of information acquired as a result of professional relationships by not disclosing it without specific authority.
- Professional Behavior: Complying with relevant laws and regulations and avoiding any conduct that discredits the profession.
2. Threats to Auditor Independence and Safeguards
Independence is the absolute cornerstone of auditing. It requires independence of mind (actual) and independence in appearance. Threats are categorized into five distinct risks:
- Self-Interest Threat: Occurs if the auditor or firm has financial interests in the client (e.g., owning shares in the client, dependency on a client for a high percentage of total fees).
- Self-Review Threat: Occurs when an auditor evaluates the results of a judgment or service they previously performed themselves (e.g., preparing the financial statements and then auditing them).
- Advocacy Threat: Occurs when an auditor promotes a client’s position to the point where objectivity is compromised (e.g., defending the client in a legal dispute).
- Familiarity Threat: Occurs due to a long or close relationship, where the auditor becomes too sympathetic to the client’s interests (e.g., a senior audit partner staying on the same client account for over 10 years). Mitigation: Mandatory partner rotation rules apply under both European and US rules.
- Intimidation Threat: Occurs when an auditor is deterred from acting objectively by actual or perceived pressures (e.g., a client threatening to terminate the audit contract over an accounting disagreement).