Accounting and Financial Statements (Ethics)
members or other people they undergo joint investments with.
The investments and other actions of immediate family members can impair auditor independence. Immediate family members consist of their spouse, or equivalent, and any dependents. The client can employ these family members, as long as they are not in a key position of influence (“AICPA Rule 101”). The family member would be in a key position of influence if they were responsible for significant accounting functions or work with preparing the financial statements. Also, immediate family members may invest in certain employee benefit plans provided the plan is offered equitably to all similar employees. The covered members whose families may invest in this way are:
1. Partners and managers who provide only non-attest services to the client
2. Partners who are covered members only because they practice in the same office where the client’s lead attest partner practices in connection with the engagement (“AICPA Rule 101”).
It is important that immediate family members are aware of these requirements to ensure that auditor independence is not impaired.
Recent Issues of Auditor Independence
Auditor independence has been brought to the forefront recently due to the new laws enacted. An example of auditor independence possibly being compromised can be seen through the relationship of Ernst and Young, Sprint PCS, and Sprint’s CEO and President. E&Y was the auditor of Sprint and at the same time it was working on tax planning for Sprint’s CEO William Esrey and President Roland LeMay. E&Y had been receiving “more non-audit fees than audit fees from Sprint for the last three years,” as a result of these non-audit services (PR Newswire). E&Y did not do anything wrong by working for Sprint as well as its top executives. However, many stakeholders felt that these executives could easily influence E&Y during an audit. Since E&Y was receiving higher fees from their non-audit services, they could feel pressured or fear that questioning actions of Sprint could cause them to lose compensation from the tax services. Therefore, E&Y may have decreased its independence with regards to its handling of Sprint. Critics of Sprint include the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), who voice the concerns of the Communications Workers of American and other unions representing Sprint employees. The AFL-CIO has “called publicly for Sprint to dump Ernst & Young” (Business Journal of Kansas City). In light of these critics, Sprint has decided to keep E&Y as its auditor since E&Y has not shown that its independence has been impaired through the various services it performs for Sprint and its top management.
Another well-known example of auditor independence truly being impaired is through the Enron scandal with its auditors Arthur Anderson. Anderson performed internal and [next page]