Threats during audit engagements can influence auditors to provide biased or partial opinions. However, it is crucial for auditors not to allow these threats to realize. In most cases, auditors must identify these threats and take the necessary actions to prevent them. This process usually happens before auditors start their work on an engagement.
There are five types of threats that auditors must identify and separate. By doing so, auditors understand the source of these threats and how to protect against them. These threats include intimidation, self-review, self-interest, familiarity, and advocacy threats. Each of these can impact the auditor’s opinion adversely. Therefore, it is crucial to understand what these are.
What is the Intimidation Threat?
The relationship between auditors and clients is unlike most other business relationships. Instead, it is a professional relationship. In this relationship, none of the parties can exude unjust pressure on the other. In some cases, however, that is what may happen. Some clients may try to pressure auditors to influence their judgment. It is a threat that auditors face known as intimidation threat.
Auditors that work on an audit engagement may face threats due to several reasons. Sometimes, these threats may come from actual pressures, but other times they may be perceived. Similarly, clients may try to attempt to exercise undue influence over the auditors. In both of these cases, auditors will face an intimidation threat.
Intimidation threats may arise when clients have a position where they can issue threats to the client. Usually, when clients have leverage over the auditors, they can use intimidation to sway their opinion in their favor. For example, when clients realize the fee dependency that auditors have on them, they may find themselves at leverage.
How Does the Intimidation Threat Work?
An intimidation threat exists if the client’s management tries to intimidate or threaten the auditor. In some cases, these threats may be negligible. Also, auditors may find that they cannot act objectively due to the influence subdued on them by the management. In these cases, auditors will find they face a threat to their independence and objectivity.
The intimidation threat works when clients try to obtain leverage over the auditor. In most cases, auditors can avoid such leverage by applying safeguards. In some other scenarios, it may be impossible to do so. Either way, if auditors believe their client is threatening them to influence their judgment, the intimidation threat will be high. Given below is an example of how it may occur.
An audit firm makes $100,000 in income each year. Out of this income, $30,000 comes from a single client. This client obtains auditing, accounting, and taxation services from the audit firm. Therefore, it constitutes the firm’s 30% of income. The audit firm is dependent on this client for its income. If the client does not continue their relationship, the firm will lose money. The client also realizes this dependency.
During the audit assignment, the audit firm finds some misstatements in the client’s financial statements. These misstatements are pervasive, and the auditors reach a conclusion that they must issue a modified report. They believe they should provide an adverse opinion as the misstatements are critical. However, when the client’s management finds out about this, they are not happy about it.
The client’s management threatens the auditors that they will cut ties in case of a qualified opinion. In this case, the auditors feel intimidated. If they don’t present an unqualified opinion, they risk losing the client’s income, which is a substantial amount. If they give a qualified opinion, it will be considered unethical and unprofessional.
Apart from fee dependency, there are other factors that contribute to intimidation threats. These include personal relationships, audit partners joining the client, or litigation between audit firms and clients. Similarly, intimidation threats can occur in other ways as well. For example, clients pressuring auditors to reduce the extent of their work, threatening them with litigation, etc.
What are the Safeguards against Intimidation Threat?
The safeguards to protect against intimidation threats are similar to other threats. Auditors need to consider each scenario and decide on the best solution accordingly. In most cases, reducing the dependency on a single client or cutting their leverage is the best option. However, that may not be possible each time.
Audit firms need to assign experienced staff to assignments that can deal with these threats. Similarly, they can involve an additional auditor who is not a member of the team to advise them on such matters. There are also many other safeguards, such as quality control or changing teams. However, if none of these works, auditors may need to consider leaving the client or ending their relationship.
Intimidation threat is when a client’s management attempts to intimidate or place undue influence on auditors. In these cases, auditors need to employ safeguards to reduce these threats or prevent them altogether. There are several examples of intimidation threats, for instance, clients threatening auditors with legal action or cutting their relationship.