Outsourcing Audit Reports – An Ethical Dilemma

In a world where ‘outsourcing’ and ‘offshoring’ are buzzwords and key drivers of business performance, is there an ethical roadblock to these behaviours within the audit profession that should be upheld?

I have recently learned about instances in the audit profession where firms have won audit engagements and conducted the field work themselves, but have outsourced the audit reports to third party audit firms. This has primarily been undertaken because the original engagement firm does not have qualified audit staff with the ability to sign the audit report on certain types of engagements. This situation got me thinking about the ethics around this type of behaviour and the potential issues for both of the audit firms, as well as the damage this may be causing within our industry.

Under APES 110 – Code of Ethics for Professional Accountants s.100.5 ‘A member shall comply with the following fundamental principles:

(a) Integrity – to be straightforward and honest in all professional and business relationships.

(b) Objectivity – to not allow bias, conflict of interest or undue influence of others to override professional or business judgments.

(c) Professional competence and due care – to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent Professional Services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards.

(d) Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the Member or third parties.

(e) Professional behaviour – to comply with relevant laws and regulations and avoid any action that discredits the profession.’

On the face value of the situation identified above, there would appear to be threats to all of these principles:

(a) Integrity – there is a potential threat should the engagement be won without disclosing the fact that the audit report will be outsourced to a third party audit firm. This would be dishonest as the omission would be misleading.

(b) Objectivity – there is a potential threat should either audit firm place undue influence over the other in order to reduce the amount of audit work performed to ensure financial gain from the engagement.

(c) Professional competence and due care – there are a number of potential threats in regards to this principle:

1 – For the engagement firm – they are relying on a third party to review the file and sign the audit report. Being removed from the signing firm and signing partner could make it difficult to gain sufficient comfort that the signing firm and signing partner have the appropriate professional competence and sufficient available time to capably sign the audit report in a timely manner.

2 – For the signing firm – they are relying on the fieldwork undertaken by the engagement firm. As such, it is unlikely that they would have any authority to monitor the training of audit staff, or ensure that the allocated engagement staff have appropriate experience and competency to perform an audit to the quality expected by the signing firm.

(d) Confidentiality – there is a potential threat should the engagement firm disclose information regarding the client to the signing firm, prior to informing the client that a third party audit firm will be signing the audit report. There is also the threat that staff of the signing firm may disclose confidential information regarding the client, which could then have implications for the engagement firm, as they do not have control of the confidentiality requirements of the signing firm’s staff.

(e) Professional behaviour – there is a potential threat should the engagement firm make exaggerated claims in regards to the service that they are able to provide when they are aware that they will need to outsource the signing of the audit report. This behaviour could affect the good reputation of our profession.

APES 110 allows for safeguards to be put in place in order to eliminate the threats or reduce them to an acceptable level.

While one might assume that the firms undertaking this type of arrangement are putting in place appropriate safeguards to eliminate or reduce the threats, the question still remains; should audit firms be tendering for and undertaking audit engagements when they are not appropriately qualified to sign the audit report?

By Steve Jones, Manager – External Audit