NZ Shareholders Members Area

NZSA Policy Statements

Audit Independence

Background

New Zealand law and regulations require an auditor to form an opinion on whether the accounts of a companygive a true and fair view of its financial position and performance and whether the accounts comply with IFRS accounting standards.

The auditor has a statutory obligation to provide an independent report to shareholders who in turn rely on a company issuing a set of accounts that are free from audit qualification.

Despite the fact that an auditor is required by law to provide an independent report, many of the major audit firms today also supply other services to their clients. These can include taxation advice, IT analysis and review, and management advisory and human resource work. These services are generally more lucrative than audit work.

Thus a situation can exist where the financial return to an auditing firm from auditing work is relatively low and is in effect subsidised by other accounting work for the company.The importance to shareholders of independent audit work is always vital.

This potential conflict can cause problems. Companies may make use of other fee work as a bargaining point to put pressure on auditors to produce a "true and fair" view in relation to company accounts. On the other hand auditors, wishing to retain high value fee work, may be perceived as appeasing the company and as a result compromising the integrity of the audit.

The usual argument is that “Chinese walls” exist in accountancy firms to prevent this conflict. In our view, this is insufficient justification and does not adequately address the perception that there may be “leakage” from one area of work to the other.

Both accounting firms and their client companies claim that auditors are familiar with the company's activities through the auditing programme, and as a result both the audit and other work is delivered in a cost effective manner. However if an audit firm is also providing consulting services, the auditor may not take a sufficiently critical and independent view when reviewing their own services. This could particularly apply to work in areas such as IT and taxation. The NZSA would prefer that regulations  were amended to bar auditors from undertaking most other services for their clients, with taxation advice possibly being exempted.
 
The NZSA Position

  1. The NZSA will call for companies to disclose non-audit work, and the nature of this work that is undertaken by accounting firms that also provide audit services to the company.
  2. The NZSA will require companies to show how potential conflicts are resolved where auditing and other accounting services are provided by the same firm.
  3. NZSA will oppose any situation where the amount paid for other work is greater than 25% of the amount paid for audit work.
  4. The NZSA will question audit independence when appropriate, and will insist that auditors report to shareholders on a basis that is clearly independent.
  5. We will oppose former partners of audit firms being appointed as directors of companies that are still being audited by their former firm.
  6. The NZSA will oppose any attempt to screen or dilute direct contact between auditors and shareholders at general meeting or other forums where an independent view of the company is requested.
  7. The NZSA expects that except in exceptional circumstances, the audit partner responsible for signing off an audit will be present at the Company AGM to answer any shareholder questions.

(Updated March 2015)