Maintaining professional independence

Independence is something that human beings seek from an early age and throughout our lives. Whether this is the ability to walk and talk on our own, get our first mobile phone, stay out later, pass a driving test, rent our first apartment, or achieve financial freedom, we all want to do things ourselves with minimal interference from others.

However, for those of us working in professional services, ‘independence’ can take on a different meaning, often making us recoil with thoughts of lengthy approval processes required to prove that independence exists in our work. How can a service provider that both audits and provides consulting services to clients prove that services are rendered independently?

Anyone who has worked as a non-auditor in a large audit firm will know all about the red tape that must be cut and hoops that must be jumped through before providing non-audit services to audit clients – with some pieces of work expressly prohibited. However, in the real world, is this enough to guarantee independence? Some regulatory and governing bodies seem to think not.

The Saudi Organization for Chartered and Professional Accountants (SOCPA) recently imposed additional restrictions on auditors from 1 July 2022, making it clear that the subject of independence is looming large. The list of allowable tax services for auditors is now clearer – and narrower – than ever. What should businesses – who buy both audit and non-audit services – make of this?

Threats to independence

Where audit and non-audit services are provided by the same consultant, potential conflicts of interest exist. Even where services are permissible, key decision makers must still question whether they are putting their organisations at risk by not seeking completely independent services from entirely separate service providers. After all, how much independence can there be if the same organisation provides statutory audit and consultancy to the same client. Three risks immediately come to mind:

Self-interest – where auditors and consultants of the same firm have significant ties with the same client, the independence of one function could easily be influenced by the amount of ‘skin in the game’ of the other – for example to retain client business (read ‘fees’), sell additional services (and receive more fees) or get a large outstanding fee paid promptly (you guessed it…). This could take the form of the audit business putting pressure on the consulting arm (or vice versa) to give ‘favourable’ treatment to further the aims of another part of the business - a direct threat to independence.

Familiarity – we tend to treat those that we like and with whom we are familiar better – it is a natural, human bias. How many times have members of large audit and consulting practices heard the words ‘I’ve known them for many years, take good care of them’ from the key client relationship holder? This is great social practice, however, in a professional setting, where independence is of the utmost importance, it doesn’t fly. Familiarity can make us averse to giving criticism or bad news when objectivity is required – which could prove negligent or even illegal.

Self-review – where professional services providers render a number of different services to a business, situations naturally arise where one arm is required to verify the work of the other. This has the potential to be about as independent as asking your grandma if you look fat – the answer is likely to be heavily laden with positive bias and may conflict with what you see in the mirror. Let’s not ask grandma whether we got our taxes right – let’s get an independent opinion.

At their core, threats to independence are ultimately threats to receiving impartial advice or audit services – which means letting clients down. While there are measures services providers can put in place, ethical walls only go so far. The system is not perfect. With the best will in the world, placing people on different floors or in different buildings and telling them not to talk to each other about an engagement cannot guarantee that conflict will not occur.

Senior decision makers must therefore be acutely aware of the potential for such threats and their potential consequences and take concrete steps to avoid putting their businesses at undue legal, financial or reputational peril.

How can threats to independence be overcome?

Additional controls put in place by regulators are a step in the right direction - but professional services providers are a canny bunch. When faced with a new restriction, the primary focus is often diverted to whether there is a work-around which, while meeting the regulatory requirements, leave the underlying issue largely unaddressed.

We are seeing moves by global accounting giants to separate their audit and consulting practices as regulators tighten restrictions but also as they recognize the need for truer independence. However, others are maintaining status quo, preferring to adapt to changes as they arise, meaning that responsibility for ensuring continued independence sits squarely between buyer and service provider. Buyers of professional services may wish to take an actively procure audit services and advice from independent sources.

Buyers increasingly prefer independent firms – who do not provide audit services – for consulting and advisory services, leaving the statutory work to more ‘classic’ large audit practices. Indeed, there appears to be a growing preference for agility and speed of engagement in consulting and advisory services, particularly as the need for them is often driven by urgent business projects or transactions. Independent and ‘boutique’ advisory firms can have an advantage here, over slower-moving, larger practices.

Whatever the reactions of buyers and service providers alike, growing restrictions aimed at ensuring independence are likely to continue, and spring up in historically less restrictive jurisdictions. If you are one of the many businesses who has adopted a ‘one-stop-shop’ model previously, it may be time to consider a change. Splitting services between different providers to achieve independence proactively, before being mandated to do so.