What are the five key requirements for auditor independence?


Independence of the auditor means independence from parties whose interests could be harmed by the results of an audit. Specifically, internal management issues are inadequate risk management, inadequate internal controls, and poor governance.

The charter of audits and, therefore, the reporting to the audit committee generally provides independence from management, the code of ethics of the corporate (and of the interior Audit profession) to provide guidance on independence from the auditee like suppliers, clients, third parties, etc.

Auditor independence also refers to the independence of the internal auditor or of the external auditor from parties which will have a financial interest within the business being audited.

Independence also requires integrity and an objective approach to the audit process. The concept requires the auditor to hold out his or her work freely and in an objective manner.

Auditor independence is usually mentioned because of the cornerstone of the auditing profession since it’s the inspiration of the public’s trust within the accounting profession.

Since 2000, a wave of high-profile in the accounting scandals has cast the profession into the limelight, negatively affecting the general public perception of auditor independence.

Why is Audit Independence Important?

Audit independence is vital so that auditor’s opinions are often impartial, unbiased, as well as free from any undue influence or/and conflict of interest to override the professional judgment of the professional accounting (Rutgers Accounting Web, 2015).

The SEC rules on audit independence are often organized into five key areas: (A) Prohibited Non-Audit Services; (B) Audit Committee Pre-Approval of Services; (C) Partner Rotation; (D) Conflict of Interest; and (E) Increased Communication and Disclosure.

A. Prohibited Non-Audit Services

Congress enumerated in Section 201 of Act nine non-audit services that are prohibited from being contemporaneously performed for a public-company client by any registered public firm that’s also serving as auditor of the client.

Related article  What impairs the independence of an auditor?

The SEC rules don’t prohibit a firm from providing non-audit services to clients they’re not auditing. The prohibited non-audit services are:

1. Internal Audit Outsourcing: Some companies outsource internal audit functions to outside firms who successfully audit their internal controls.

The SEC now prohibits a firm from providing to its audit client any internal audit service that has been outsourced by the audit client which relates to the audit client’s internal accounting controls, financial systems, or financial statements.

2. Management and Human Resources Functions: An accountant is prohibited from acting as a director, officer, or employee of an audit client or performing any decision-making, supervisory, or ongoing monitoring function for the audit client.

The principles also prohibit a firm from checking out employee candidates, performing reference checks of candidates, engaging in testing or evaluation programs, or recommending a selected candidate for a selected job.

3. Investment Advising Services: it’s impermissible for a firm to perform brokerage, investment advising, or investment banking services for an audit client.

It cannot function an unregistered broker-dealer, promoter, underwriter, make investment decisions for an audit client, or otherwise have discretionary authority over an audit client’s investments.

Doing so is incompatible with the auditor’s responsibility to make sure that the client’s economic condition is fairly presented to the general public.

4. Bookkeeping: If an auditor firm provided bookkeeping services for an audit client, it might later be placed within the position of auditing its work, and thus would lack independence.

As a result, all bookkeeping services, like maintaining accounting records, preparing financial statements, or preparing source data, are prohibited from being performed by an auditing firm.

Related article  What Is the Difference Between Audit and Assurance? Which one is Better?

5. Financial Information: System Design or Implementation. A firm might not provide any service associated with the audit client’s data system unless it’s reasonable to conclude that the results of those services won’t be subject to audit procedures during an audit of the client’s financial statements.

For instance, a firm would be permitted to figure on hardware or software systems that are unrelated to the audit client’s financial statements or accounting records as long as those services are pre-approved by the audit committee.

6. Legal Services: An firm is prohibited from providing to an audit client any service that would only be provided by someone licensed to practice law within the jurisdiction during which the service is provided.

B. Audit Committee Pre-Approval of Services

An audit committee is defined in Section 2 of the Act as a committee established by and among the board of directors of a publicly-traded client to oversee the accounting and financial reporting processes of the client and audits of the financial statements of the client.

If no such committee of the board exists, the committee is deemed to be the whole board of directors of the client.

C. Partner Rotation

An audit engagement team is defined as all partners and professional employees participating in an audit, review, or attestation engagement of an audit client.

To preserve the independence and maintain quality of audit services, Congress included in section 203 of the Act a requirement that audit partners “rotate off” of a selected client engagement after a specific period.

In developing rules on partner rotation, the rule has classified partners into different levels and established rules for every level of partner.

Related article  10 Best Business Consultancy and Advisory Services In Cambodia

D. Conflicts of Interest

Section 206 of the Act sets forth a conflict of interest rule whereby a one-year cooling-off period is required before a member of the audit engagement team can begin working for the audit client in certain key positions.

The rule provides that when the lead partner, concurring partner, or the other member of the audit engagement team who provides quite ten hours of audit, review, or attests services for the client accepts an edge with the audit client during a financial reporting oversight role within one year after they provided such services to the client, the firm isn’t independent.

E. Improve Communication and Disclosure

Section 204 requires the SEC to issue rules requiring timely reporting of specific information to audit committees to help the committee in overseeing both management and therefore the accountants.

The SEC has added substance to the present rule by requiring disclosures for 3 sorts of information that has got to occur before the filing of the audit report with the SEC.


This post has sought to supply a summary of the ultimate auditor independence rules. These rules were the topic of serious debate during the rulemaking process, and can surely be subject to further criticism as they start to be implemented.

But, public companies and registered public accounting firms will likely take very seriously these rules, given the Act’s harsh criminal penalties.

These rules are implemented to guard auditor independence from management pressure and influence to revive public confidence within the veracity of public company disclosures.

Whether or not they will prove effective and price the burden are going to be determined within the years, and hopefully bull markets, to come.