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INDEPENDENCE THREATS &

SAFEGUARDS
ICAI CODE OF ETHICS
Sairam Natarajan, CFE, IRMCert | June 2020

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Agenda
■ Threats to
■ Fundamental Principles Independence
■ What is Independence? ■ Addressing Threats
■ Managing Perceptions ■ Case study
■ Exercise of Professional Judgement ■ Things to think about
■ Reasonable and Informed Third ■ Questions
Party Test
■ Additional resources
■ Questions

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Fundamental Principles
■ Integrity: being straight-forward & honest
■ Objectivity: Free from bias, conflict of interest or undue influence
■ Professional Competence and due care: maintains professional
knowledge and skill at the level required
■ Confidentiality: Non-disclosure of client information and/or personally
identifiable information
■ Professional Behaviour: compliance with relevant laws and regulations
and avoiding actions which discredit the profession.

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What is Independence?
■ Independence of mind
The state of mind that permits the expression of a conclusion without
being affected by influences that compromise professional judgment,
thereby allowing an individual to act with integrity, and exercise
objectivity and professional skepticism.

■ Independence in appearance
The avoidance of facts and circumstances that are so significant that a
reasonable and informed third party would be likely to conclude that a
firm’s or an audit or assurance team member’s integrity, objectivity or
professional skepticism has been compromised.
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Managing Perceptions

Independence in appearance is difficult to manage but you can do this

by:

■ Exercising professional judgment (or skepticism)

■ Remaining alert to changes in facts and circumstances
■ Using reasonable and informed third party test

NOT DOCUMENTED IS NOT DONE

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Exercise of Professional Judgment
Matters to consider
There is reason to be concerned that potentially
relevant information might be missing from the facts non-assurance services to your assurance
and circumstances known to the accountant
There is an inconsistency between the known facts
and circumstances and the accountant’s
expectations
There is a need to consult with others with relevant
expertise or experience
The accountant’s own preconception or bias might
be affecting the accountant’s exercise of
professional judgment
There might be other reasonable conclusions that
could be reached from the available information
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Examples
Do you know whether you/your firm provides any
clients?
Does the client expect you to represent them at
the tax tribunal when you are aware of the
potential advocacy issues?
Given your relationships with your assurance
client, do you need to consult someone else in
your firm/the regulator/an ethics professional?
In the above example, could your relationships
affect or be perceived as having affected your
professional judgement?
Is it possible that a regulator or an informed
investor might reach a different conclusion?
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Reasonable and Informed Third Party

The reasonable and informed third party test is a consideration by the

professional accountant about whether the same conclusions would
likely be reached by another party. Such consideration is made from the
perspective of a reasonable and informed third party, who weighs all the
relevant facts and circumstances that the accountant knows, or could
reasonably be expected to know, at the time the conclusions are made.
The reasonable and informed third party does not need to be an
accountant, but would possess the relevant knowledge and experience to
understand and evaluate the appropriateness of the accountant’s
conclusions in an impartial manner.

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Threats to Independence

■ Self-interest threat
■ Self-review threat
■ Advocacy threat
■ Familiarity threat
■ Intimidation threat

A particular scenario might create more than one threat

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Threats to Independence

Self-interest threat

The threat that a financial or other interest will inappropriately influence

a professional accountant’s judgment or behaviour

e.g. income from other services provided by the auditor (other than ones
disallowed by the Act) affects how far the auditor may be influenced (or
perceived as such) by the management.

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Threats to Independence

Self-review threat

The threat that a professional accountant will not appropriately evaluate

the results of a previous judgment made; or an activity performed by the
accountant, or by another individual within the accountant’s firm or
employing organization, on which the accountant will rely when forming
a judgment as part of performing a current activity

e.g. auditor assists with preparation of the financial statements for ABC
Company while also serving as the auditor for ABC Company
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Threats to Independence

Advocacy threat

The threat that a professional accountant will promote a client’s or

employing organization’s position to the point that the accountant’s
objectivity is compromised

e.g. advocating or negotiating on behalf of client in resolving disputes

with third parties

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Threats to Independence

Familiarity threat

The threat that due to a long or close relationship with a client, or

employing organization, a professional accountant will be too
sympathetic to their interests or too accepting of their work

e.g. auditing same client for numerous years or having a close

relationship with director or officer

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Threats to Independence

Intimidation threat

The threat that a professional accountant will be deterred from acting

objectively because of actual or perceived pressures, including attempts
to exercise undue influence over the accountant

e.g. being threatened with dismissal as auditor of client or being

pressured to reduce extent of work below what is required in an attempt
to reduce fees

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Threats to Independence

Factors Relevant in Evaluating the Level of Threats

■ Specific factors
– whether client is a public interest entity (PIE)
– qualitative as well as quantitative factors relevant to the facts and
circumstances
– the combined effect of multiple threats

In your firms, have you agreed to treat certain clients or categories of

entities as PIEs? 16

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Threats to Independence

Factors Relevant in Evaluating the Level of Threats

■ General factors
– Corporate governance procedures including role of Those
Charged With Governance
– Educational, training and experience of professionals
– Effective complaint systems which enable the professional
accountant and the general public to draw attention to unethical
behaviour
– Monitoring and disciplinary procedures
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Threats to Independence

Consideration of New Information or

Changes in Facts and Circumstances

Do these:
■ Impact the level of a threat
■ Affect the accountant’s conclusions
about whether safeguards applied
continue to be appropriate to
address identified threats

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Addressing Threats
Gifts,
Auditor/partner
entertainment
rotation
and hospitality

Non-audit Employment
services relationships

Actual or
Business
threatened
relationships
litigation

Financial
relationships Independence Fee matters

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Addressing Threats • Disposing off a financial

interest
• Changing the
• Declining or ending partner/employee
business relationship working on an
• Declining or ending engagement
non-audit engagement Declining or • Partner rotation
Eliminating
• Declining or ending ending
the
audit engagement professional
circumstance
activity

• Using professionals who are not audit

team members to perform the
service
• Additional review of audit and/or non-
Applying safeguards audit work by an internal or external
professional
• Regular independent internal or
external quality reviews
• Ensuring that client management
makes all judgments and decisions
Examples only. Not an exhaustive list. 20

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Case study
Facts and circumstances
• PIE audit client, in scope for NFRA
• Advisory Services for the conversion
of the financial statements of the
company to converge to IndAS
• Provide advice, recommendation,
and observation on the impact
analysis report, accounting policies,
the draft opening Balance Sheet,
specific advances classification and
measurement, review of valuations
for specific securities
• Expected credit loss (maximum two
types of model) for retail and
corporate
• Advice in preparation of financial
statements
Engagement Partner: Ms. ABC (Ms. ABC
is also involved in audit engagement)
AQR report by NFRA
Independence issues
• Does the engagement involve
design and implementation of
financial information system?
• To what extent will the results of
the work be subject to review as
part of audit procedures?
• Do the services fall in the
purview of accounting and book-
keeping services?
• Does Ms. ABC’s involvement in
audit engagement create
familiarity threat?
• Has the service been approved
by the audit committee?
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Threats to consider Potential safeguards to
consider
• Self-review Self-review
• Familiarity • For PIE audits, any services
in the nature of design and
implementation of a
financial system is
PROHIBITED.
• No safeguards can be put
in place.
Familiarity
• Using different partners
with separate reporting
lines for the provision of
non-assurance services
• Approval by audit
committee before
accepting the engagement
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Case study
Facts and circumstances
• Private audit client
• ERP implementation assistance
for indirect tax laws
• International tax services in
relation to EPC, Royalty, FTS,
analysis of constitution of PE etc.
• TP Planning, Study &
Compliances
• Representation before
adjudication/appellate
authorities
In addition,
• Audit partner’s brother-in-law is
the finance director at the client
• Each year, the finance director
takes the audit partner and his
wife (BIL and sister) to the IPL
final in the hospitality box on
company cost
Independence issues
• Will the ERP implementation
services including designing or
implementation of the ERP or is it
limited to assistance and support?
• Are the amounts in dispute with
tax authorities material to the
client?
• As part of the international tax
services involve calculation of tax
values that may have a direct
effect on the financial
statements?
• Does Mr. XYZ’s long association
with the client create familiarity
threats?
• Does the audit partner’s
relationship create familiarity
threats?
• Does the hospitality offered by the
finance director cause a
perception of undue influence?
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Threats to Potential safeguards to consider
consider
• Self-review Self-review
• Advocacy • Using different partners with
• Self-interest separate reporting lines for the
• Familiarity provision of non-assurance
services
• Ensuring that management
assigns the responsibility to an
informed and competence
employee (preferably senior
management) to make all
management decisions
Advocacy
• Any services where the
amounts are material is
PROHIBITED.
Self-interest and familiarity:
• Audit partner rotation
• Declining further gifts and
hospitality
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Things to think about

■ What is your independence policy? Does your firm audit any PIEs? If yes,
does your policy sufficiently address independence risks with regard to PIE
audits?
■ What is your firm’s approach to managing independence risk? Who do you
consult for complex/technical independence risk matters?
■ How often do your firm’s partners and employees undergo independence
and ethics training? When was the last time?
■ To what extent have you invested in people, systems and tools to enable
your firm identify, assess, manage, document and report independence
risk matters? Is this consistent with the size and scale of your firm’s and
your clients’ operations?
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Additional Resources
■ ICAI Code of Ethics, 2019
■ Section 144, Companies Act 2013
■ AQR Report, NFRA
■ Business of Ethics

If you have any questions on topics discusses, please write to me at

sairam.natarajan@gmail.com or WhatsApp me on +44 7788 383686

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