For auditors, it is crucial to ensure that they are independent of the client’s activities. On top of that, they must ascertain objectivity in their dealings with the client. In some cases, however, their independence and objectivity may be under scrutiny. These are when auditors face threats, which can lead to adverse effects. Ultimately, these threats stop auditors from acting objectively.
There are five threats that auditors must analyze for each audit engagement. For new clients, it is crucial for auditors to find any threats before taking up the audit engagement. Nonetheless, it is also critical to evaluate existing clients and see if anything has changed. Generally, auditors need to identify five threats, including advocacy, familiarity, intimidation, self-interest, and self-review threats.
What is Advocacy Threat to Independence of Auditor?
In some circumstances, auditors may act as a client’s promoter or representer. In these cases, the auditor behaves as the client’s advocate. The advocacy threat to the auditor’s independence occurs when auditors promote an opinion or position on the client’s behalf. In most circumstances, if the impact is minimal, it is ignorable. However, if the auditor’s judgment or objectivity becomes compromised from such advocacy, the advocacy threat occurs.
Most audit firms don’t limit their services to audit activities only. They may also provide additional services, such as accounting, taxation, advisory, etc. In some cases, auditors may also act on the client’s behalf to represent, promote or defend them. If taking sides with the client affects the auditor’s independence, then the advocacy threat is the highest.
How Does the Advocacy Threat Work?
The advocacy threat is significant when auditors represent clients in matters that materially impact the financial statements. For example, when an auditor acts on the client’s behalf in a court or other legal issues. Similarly, negotiating on the client’s behalf in financial matters also qualifies auditors for an advocacy threat.
In most cases, auditors don’t need to consider the consequences of representing their clients. However, if the amounts become material, they must employ safeguards against such threats. Even when the matter is not material or does not affect the financial statements, having countermeasures is a good measure. Given below is an example of an advocacy threat.
An auditor provides client services related to promoting its newly issued shares in the market. For the auditor, the higher the finance they raise, the better it is. Therefore, they always try to maximize the amounts they receive from selling any shares. In the meanwhile, they also a part of the team that is responsible for auditing the client.
The client’s financial statements don’t have any material misstatements except for one area, sales. The auditor understands that by exaggerating their sales, the client is trying to increase its profits. This increase in profits will also translate to higher share prices in the market and increased demand. Therefore, the client will get more finance due to the increased demand.
The auditor has two choices in this circumstance. As an auditor, it is crucial to understand that not disclosing the misstatements will be considered unethical and unprofessional. On top of that, it represents the auditor not being independent of the client and not applying objectivity. On the other hand, they can disclose the information, which will reduce the client’s stock prices. This decrease can affect the auditor in the other service.
In this case, the misstatement is pervasive. Therefore, it will have a significant impact on stakeholders’ decisions. In this example scenario, the advocacy threat for the auditor is high. It is because they are promoting the client to the point where they have compromised their objectivity.
What are the Safeguards against Advocacy Threat?
Like most other threats, auditors can avoid advocacy threats by employing some safeguards. Firstly, auditors need to consider whether they need to modify the assurance plan for the audit engagement. On top of that, segregating audit team members is also critical in avoiding these matters. Sometimes, however, it may be the audit firm and not specific members that cause this threat.
In most circumstances, auditors need to evaluate whether the matters are material to the financial statements. If so, they must decline any requests from the client to act on their behalf. Auditors can also choose not to continue their audit services to the client and continue representing them. However, the same safeguards do not apply to immaterial matters.
In cases where the matter is not material to the financial statements, auditors have two options. As mentioned, they can segregate both teams not to allow biased opinions to transfer from one assignment to another. Or, they can have a professional advisor to the audit team on how to deal with the audit engagement. However, this professional must not be a part of representing or promoting the client.
Conclusion
When auditors represent their clients or promote them, they may impose an advocacy threat on the client’s audit. This threat is at its highest when the matter is material to the financial statements. In those circumstances, the International Standards for Auditing advise auditors to reject providing these services. In case it is immaterial, auditors have two options, as mentioned above.
