Definition

In the accounting and assurance profession, independence refers to the unbiased and impartial nature of the practitioner in relation to a client or potential client. An assurance provider must be free from any circumstance that could affect their professional judgment during the course of an engagement, including, but not limited to, personal relationships, financial interests, and client involvement. A practitioner must be independent of mind, absent of influences to judgment, and independent in appearance to outside parties. Independence regulations apply to those involved in performing the engagement, supervisory individuals, and any consultants involved in the engagement, as well as the firm as a whole.

Background

Independence regulations have been in place for several decades but began to morph into the modern version in the early 2000s, beginning with the 2001 Code of Ethics. The Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), and Department of Labor (DOL) followed suit and have each instituted their own versions of independence requirement for assurance practitioners performing engagements that may fall under their jurisdiction. Scandals, such as those discovered with Enron and WorldCom drew much attention to the need to strengthen stipulations to protect individuals and entities.

Importance

The need for such regulations stems from the necessity for objectivity in providing assurance on the state of client records and financial condition of the entity. In many cases, creditors and investors may depend on the opinions provided by the assurance member in making business decisions, so properly following the specified independence rules offers to the users the highest level of comfort in the integrity of the financial information being evaluated, whereas violations will likely cast significant doubt on the accuracy of the reports.

Assurance Engagements that Require Independence

Full independence is required in performance of all audit, review, and attestation engagements, as the objective is to provide some level of assurance regarding the condition of the financial records. Attestation engagements include examinations and reports on entity controls. Compilation engagements may be performed when the provider is not independent with appropriate disclosure.

Common Independence Impairments

Threats to independence can be categorized into one or more of the following classifications: self-interest, self-review, advocacy, familiarity, and intimidation. Self-review threats pertain to relationships that involve the provider reviewing work they had performed in an additional service provided to the client and self-interest refers to having a practitioner having financial interest in the company. Self-review and self-interest are the most common instances of independence violation.