Ethics a lot of time and money into
Company- James Cropper PLC
Auditors – Klynveld Peat Marwick Goerdeler (KPMG)
The ethical threat:
I have gone through the James Cropper’s annual reports, and I have found out that the company has had KPMG as their main auditors for almost 9 years. They used to be audited by PriceWaterHouseCooper till the latter have declared their intention not to renew their partnership, which made the company to choose another audit firm and they started dealing with KPMG in 2008. This long association is worrying as a threat of familiarity could arise, and may lead to jeopardizing the objectivity and independence of the company.
Auditors are responsible for assuring that the company’s financial statements do not contain any misstatements, close or long bonds with clients could obstruct detecting errors or fraud.
A familiarity threat may occur when the relationship between the audit firm and the company is close and they have had a long association, as the accountant will be influenced by that and turn excessively approving and less skeptic of their work.
The significance of threat:
Familiarity may be beneficial as the audit firm will have a good knowledge about the reports needed for their work and their whereabouts, because they have already done these audit cycles before, which will mean reduction in the time spent on these procedures and increased effectiveness.
Opting for perusing your relationship with the audit firm, as opposed to switching to another, is cost-effective; because the business would need to pour a lot of time and money into the audit new firm and direct it towards training their auditors and familiarizing them with the company’s operations. The bill with the old audit firm can generally be anticipated, however, the new firm won’t be as consistent and it’s likely that the bill would suffer some additional costs such as bookkeeping.
The long partnership with an audit firm will reflect positively on the work environment, as both sides would get used to each other and the employees would not dread it, resulting in efficient audits.
On the other hand, independence is essential in auditing; the auditors should confidentially examine the company’s performance, without the clients being made aware of their progress.
Experts believe that objectivity might be at risk in such circumstances, considering the auditors will be lenient with their clients by not attempting to test their operations thoroughly. This might come at a cost of neglecting potential cases of fraud hidden by clients.
Audit firm tends to prioritize newer clients and work harder with them as they seek to prove their worth. This comes at the expense of early clients, as they are deemed guaranteed clients and there isn’t as much of a motivation to impress them.
Although the fees with appointing a new audit firm might be higher than remaining with your current one, it’s regularly worth it. Being long associated with a firm could backfire at you at some stage, because the lack of scrutinizing by the audit firm could result in fraud issues coming to light, and you end up paying triple the amounts in courts.
Auditors may have applied their evaluation in a certain way throughout the years, and could continue operating in the same manner despite it not being the recommended or best way anymore. James Cropper, for instance, has been with KPMG for nearly a decade, their accounts could not have properly appraised for a while now.
Safeguards are defined as steps or actions taken to prevent, eradicate or reduce ethical threats to harmless levels. These points are the appropriate safeguards to remove or lessen the degree of the familiarity threat:
– Audit partners and members of the engagements team gets rotated periodically to split them with the client.
– Appointing a more knowledgeable assurance team to become part of the team.
– Assigning a new partner to the team to evaluate the work done and provide notes on what changes should be made.
– Prohibiting the individual with the long association from receiving any benefits or gifts from that firm, unless it was pre-arranged. Moreover, payments made to the individual should not at a level big enough to persuade him to make decisions that’ll reflect negatively on the firm and its independence.
– Distancing the concerned individual far away from the firm’s meetings or professional activities.
– Perform internal formal assessments to the particular engagement.