Question

Following the Special Committee investigation in late 2003, Le-Nature's dismissed EY and retained BDO Seidman to serve as its independent audit firm. What safeguards are in place to mitigate the impact of auditor changes on the credibility and integrity of the independent audit function?

Answer 1

an auditor's independence is impaired if the auditor is not, or a reasonable investor with knowledge of all the facts and circumstances would conclude that the auditor is not, capable of exercising objective and impartial judgment on all issues encompassed within the audit engagement. To determine whether an auditor is independent under this standard an audit committee needs to consider all of the relationships between the auditor and the company, the company's management and directors, not just those relationships related to reports filed with the Commission. The audit committee should consider whether a relationship with or service provided by an auditor:

(a) creates a mutual or conflicting interest with their audit client;
(b) places them in the position of auditing their own work;
(c) results in their acting as management or an employee of the audit client; or
(d) places them in a position of being an advocate for the audit client.

The Commission rules also address specific auditor independence issues, some of which are:

Change of Independent Auditors

The auditor generally must be independent for the entire engagement period and the period covered by the financial statements being audited. Once this relationship is terminated, there is no continuing requirement for the auditor to remain independent. The auditor may generally re-issue its former opinions on the company's financial statements. However, if a restatement of the financial statements becomes necessary, the auditor must be independent to audit the restatement adjustments and re-issue its opinion. Further, if the Board is contemplating or plans a change in auditors, the audit committee must consider whether the prospective firm will be independent during the audit engagement period. That is, the prospective firm must cease all prohibited services and/or sever all prohibited relationships with the issuer prior to the beginning of the audit engagement period. Therefore, the audit committee should consider these issues before hiring a predecessor auditor or a prospective auditor to provide non-audit services to the company or its affiliates. Prospective firms can not audit financial statements of years that they were not independent.

Addressing Independence Issues

The audit committee should discuss and thoroughly investigate any potential independence impairments or issues. The audit committee should also consider seeking guidance from legal counsel, the auditor and the Office of the Chief Accountant (OCA).

Auditor Independence Safeguards•

Safeguardsthat may eliminate or reduce such threats to anacceptable level fall into two broad categories:1.Safeguards created by the profession, legislation orregulation; and2.Safeguards in the work environment.42

Auditor Independence Safeguards•

Examplesof safeguards in the work environment foraccountants inpractice:–The firm’s leadership stressing compliance with fundamental principles–Policies and procedures to manage reliance on revenue from a singleclient–Rotating senior assurance team personnel–Using different teams for non-assurance work–Prohibiting individuals who are not team members from influencingthe outcome of the engagement–Policies and procedures encouraging staff to communicate to seniormanagement of any ethical compliance issue that concerns them–Advising staff of independence requirements in relation to specificclients–Disciplinary measures44