Independence Issues
Independence is an essential standard for auditors to maintain, which they should always be mindful of when they take on new roles. Independence issues are viewed here through the lenses of Government Auditing Standards in the United States and comments by auditors whose organizations have played non-traditional roles related to performance measurement (Role 3: Define or measure performance; Role 4: Encourage or assist management; or Role 5: Assist elected officials or citizens). The issue is not whether auditors can play these roles, but how they perform specific practices when playing these roles to be sure they uphold a high standard of auditor independence, especially when involved in:
Independence is an important and still evolving issue with respect to auditors and performance measurement. Government auditors not only must carefully assess how they will play new roles and with respect to independence, but also must keep abreast of evolving standards and re-assess their existing practices as standards of auditor independence change.
Independence and Nonaudit Services in Government Auditing Standards in the U.S.
The 2003 edition of Government Auditing Standards (GAS or “Yellow Book”) by the U.S. General Accounting Office (GAO) put special emphasis auditor independence, and on the need for auditors who deliver nonaudit (e.g., “consulting”) services to take special care to avoid violating the independence standard either in fact or in appearance. The 2007 edition of Government Auditing Standards covers “Organizational Independence When Performing Nonaudit Services” (paragraphs 3.20–3.30, and Appendix I paragraphs A3.02–A3.03) and attempts to clarify to this issue by describing three distinct categories of nonaudit services:
- Nonaudit services that do not impair auditor independence
- Nonaudit services that would not impair independence if supplemental safeguards are implemented (supplemental safeguards are described in paragraph 3.30)
- Nonaudit services that impair independence, and supplemental safeguards will not overcome this impairment.
Independence and Advocacy or Assistance by Auditors
Among auditor practices that could impair independence are those involving advocacy or assistance to management or other decision makers, such as:
- Practice 3a: Help choose measures or targets;
- Practice 4a: Encourage management;
- Practice 4b: Assist management;
- Practice 5a: External advocacy;
- Practice 5c: Assist external decision makers.
Examples of nonaudit services in the 2007 Yellow Book suggest that auditors performing such advocacy or assistance practices can avoid impairment of their independence if it is clear that the auditors are providing technical advice, assistance, speeches, presentations, or training, and not making decisions for the entity they audit. In many cases, such nonaudit services can fall into the first category above of clearly not impairing independence. (See examples in paragraphs 3.27 and A3.03). Some of these nonaudit services (e.g., advising on design or installation of information technology to support performance measurement) may fall into the second category and not impair independence if “supplemental safeguards” are implemented. Safeguards can include, for example, a written understanding with the audited entity concerning the objectives, scope, and deliverables of the nonaudit service; and “management’s responsibility for (1) the subject matter of the nonaudit services, (2) the substantive outcomes of the work, and (3) making any decisions that involve management functions related to the nonaudit service and accepting full responsibility for such decisions” (paragraph 3.30b).
These kinds of advocacy and assistance practices have been central to leadership roles some audit organizations have played in advancing performance management in their government, such as those in the City of Portland, Oregon, the City of Austin, Texas, and the State of Florida. In the 2003 research that led to publication of the 2004 guide, Auditor Roles in Government Performance Measurement, researchers asked a number of leaders in audit organizations that perform these practices about independence issues. Most emphasized that however much research or assistance they provide, or advice they offer in developing measures or systems, management or policy officials always make the final decisions on what performance measures to adopt for management or decision making, and what systems to implement or improve. Hence, they felt that under those circumstances, they could play these roles without impairing their independence.
Other practices documented on this website that could raise questions about auditor independence include Practice 3b. Collect data (outside the traditional audit process) and Practice 5b. Report performance. For example, common activities done by auditors under practice 3b are to conduct surveys or focus groups of citizens, service customers, or business owners. And a common activity under Practice 5b is to issue external reports on performance of their government entity’s services. However, while these practices for auditors may be performed “outside the traditional audit process,” some auditors still consider the practices to be audit work, even if “non-traditional.” In 2003, leaders of several audit organizations that perform such work commented to researchers that they consider their data collection through surveys or focus groups, and their external performance reports, to be audit work and they perform them according to appropriate auditing standards. The clarifying language in the 2007 Yellow Book may provide further guidance on which specific activities should be considered “audit services” and which are “nonaudit services.” But as noted above, some nonaudit services can be provided without impairing independence. For example, these can include conducting and reporting on surveys “as an independent third party” (paragraph A3.03g).
When auditors issue external performance reports (practice 5b) potentially intriguing independence issues could emerge, depending on the context of the report and the data reported, and other practices performed by the audit organization. For example, auditors that issue performance reports often check or test performance information (Practice 2a. Test relevance or reliability) before reporting it. That can be a reasonable combination of practices, as long as the auditors are not testing their own data, but testing management’s data or data from a third-party which they then include in the report. A combination of practices that has not yet become known to this project is Practice 5b. Report performance and Practice 2b. Assure performance reports. This would seem to be an illogical combination of practices, at least when applied to the same reports, as it would be hard to imagine a situation in which auditors can audit their own reports without impairing independence. |
