The five threats to auditor independence are self-interest, self-review, advocacy, familiarity and intimidation. The UK FRC adds a sixth, the management threat. Safeguards include partner rotation, limits on fees and non-audit work, and audit committee oversight. If no safeguard is enough, the auditor should decline or resign.
Threats and safeguards
| Threat | What it is | Example | Safeguard |
|---|---|---|---|
| Self-interest | A financial or other interest affects judgement | Audit fees are a large share of the firm's income; an auditor owns shares in the client | Fee dependence limits; ban on financial interests |
| Self-review | Auditing work the firm or person did | The firm designed the accounting system it now audits; an internal auditor reviews a control they set up | Separate teams; no non-audit work for audit clients where this arises |
| Advocacy | Promoting the client's position | Representing the client in a tax dispute or promoting its shares | Decline the work; separate teams |
| Familiarity | Too close a relationship, too trusting | The same partner for 12 years; a former audit partner now the client's finance director | Partner rotation; cooling-off periods |
| Intimidation | Pressure, real or perceived | A finance director threatens to put the audit out to tender over a disagreement | Audit committee oversight; escalation to the board |
| Management (FRC) | Taking management decisions | The auditor decides which system to buy or approves journals | Management keeps decisions; informed management in place |
Keeping internal audit independent
Chapter 11 of the book sets out four protections for internal auditors:
- Independence from executives: the chief internal auditor has direct access to the chair, and the audit committee, not the CEO, approves their appointment and removal.
- Audit committee oversight: the committee makes sure internal audit has the authority, resources and freedom it needs.
- Objectivity and scepticism: auditors challenge evidence rather than accept it.
- Professional codes: the IIA standards and professional body codes, such as ACCA's, reinforce integrity and objectivity.
UK rules for external auditors of listed and public interest entities
- The engagement partner must rotate after 5 years, followed by a cooling-off period.
- The audit must be put out to tender at least every 10 years and the firm changed after 20 at most.
- Non-audit fees are capped at 70% of the average audit fee over the last three years, and many services are banned outright.
- The audit committee recommends the auditor's appointment and approves non-audit services.
Rules vary by entity type and change over time: check the current FRC Ethical Standard before relying on a figure in practice.
Auditor independence in ACCA SBL
This sits in organisational control and audit (syllabus area F) and professionalism (area A). Typical tasks: an internal audit team reporting to the finance director, or a long-serving audit partner. Name the threat, explain why it matters using case facts, and recommend a practical safeguard. Link to the role of NEDs on the audit committee.
FAQs
What are the five threats to auditor independence?
Self-interest, self-review, advocacy, familiarity and intimidation. These come from the IESBA Code of Ethics, which the ACCA Code follows. The UK FRC Ethical Standard adds a sixth: the management threat.
What is an advocacy threat?
When the auditor promotes the client's position so far that their objectivity is compromised, for example acting for the client in a legal dispute or promoting its shares.
What is an intimidation threat in audit?
When the auditor is deterred from acting objectively by real or perceived pressure, such as a finance director threatening to replace the firm or a dominant chief executive.
What is the management threat?
Under the FRC Ethical Standard, the risk that the audit firm takes decisions that are the responsibility of management, so it is no longer independent of the work it audits.
How is internal audit kept independent?
The head of internal audit reports to the audit committee, not the finance director, and has direct access to the chair. The audit committee approves their appointment and removal, and internal auditors do not audit work they designed or ran.
What safeguards reduce independence threats?
Rotating key partners, limiting non-audit services and fee dependence, independent quality review, audit committee oversight, and refusing or ending the engagement when no safeguard is enough.