You are about to retire as senior, and audit, partner from a firm of registered auditors. One of the firm’s long standing audit clients has asked you to become a non-executive director at a nominal salary.
This is a role you would like to accept. However, you are concerned because the partnership is not in a position to repay your capital account in one lump sum (currently standing at £150,000) and it has been informally agreed that you will be paid out in equal instalments at quarterly intervals over the next three years,.
No agreement to this effect has yet been signed because there are other issues still to be determined.
CAN YOU ACCEPT THE POSITION AS NON-EXECUTIVE DIRECTOR TO THE CLIENT COMPANY WHILST YOUR OLD FIRM CONTINUES TO ACT AS AUDITOR?
You will need to have regard to any conditions in your partnership agreement as to restrictions on taking up employment/appointment as an officer of a company on leaving the partnership.
If you would not be in breach of contract by taking up the non-executive role then you are free to do so. Under APB Revised Ethical Standard 2, “audit firms shall establish policies and procedures that require all partners in the audit firm to notify the firm of any situation involving their potential employment with any entity audited by the firm”. [ES 2 (Revised) paragraph 44]
However, if you choose to accept the appointment, the partnership will have to consider withdrawing from the audit, since in the circumstances, it is unlikely that sufficient safeguards could be put in place, as required by ACCA Rulebook 2009 section 3.4 paragraphs 101-103 and 105:
101. A firm's or a member of the assurance team's independence may be threatened if a director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter information of the assurance engagement has been a member of the assurance team or partner of the firm.
Such circumstances may create self-interest, familiarity and intimidation threats particularly when significant connections remain between the individual and his or her former firm. Similarly, a member of the assurance team's independence may be threatened when an individual participates in the assurance engagement knowing, or having reason to believe, that he or she is to, or may, join the assurance client some time in the future.
102. If a member of the assurance team, partner or former partner of the firm has joined the assurance client, the significance of the self-interest, familiarity or intimidation threats created will depend upon the following factors:
(a) the position the individual has taken at the assurance client;
(b) the amount of any involvement the individual will have with
the assurance team;
(c) the length of time that has passed since the individual was a
member of the assurance team or firm; and
(d) the former position of the individual within the assurance
team or firm.
The significance of the threat should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:
(a) considering the appropriateness or necessity of modifying the
assurance plan for the assurance engagement;
(b) assigning an assurance team to the subsequent assurance
engagement that is of sufficient experience in relation to the
individual who has joined the assurance client;
(c) involving an additional professional accountant who was not a
member of the assurance team to review the work done or
otherwise advise as necessary; or
(d) quality control review of the assurance engagement.
In all cases all of the following safeguards are necessary to reduce the threat to an acceptable level:
(a) the individual concerned is not entitled to any benefits or
payments from the firm unless these are made in accordance
with fixed pre-determined arrangements. In addition, any
amount owed to the individual should not be of such
significance to threaten the firm's independence; and
(b) the individual does not continue to participate or appear to
participate in the firm's business or professional activities.
103. A self-interest threat is created when a member of the assurance team participates in the assurance engagement while knowing, or having reason to believe, that he or she is to, or may, join the assurance client some time in the future. This threat can be reduced to an acceptable level by the application of all of the following safeguards:
(a) policies and procedures to require the individual to notify the
firm when entering serious employment negotiations with the
assurance client; and
(b) removal of the individual from the assurance engagement.
In addition, consideration should be given to performing an
independent review of any significant judgements made by
that individual while on the engagement.
105. Similarly, in the case of a financial statement audit client, a key audit partner should not accept a key management position with their audit client unless at least two years have elapsed since the conclusion of the audit.
There are similar provisions in Ethical Standard 2 (Revised) at paragraphs 36 – 50, Employment Relationships Management Role with an Audited Entity.
As stated in the ACCA Rulebook 2009, by way of note to section 3.4 paragraph 7:
The Auditing Practices Board (APB) has issued Ethical Standards to be applied in the audit of historical financial information in the United Kingdom and the Republic of Ireland. APB Ethical Standards are effective for audits of historical financial information for periods commencing on or after 15 December 2004 (subject to transitional provisions set out therein or in accompanying guidance).
Any audit firm, any person in an audit firm who is directly involved in an audit and any person in an audit firm who is part of the chain of command for an audit to which APB Ethical Standards apply must comply with their requirements. Where relevant, members must therefore comply with both APB's Ethical Standards and this section 3.4. Where there is any apparent conflict between requirements, members must comply with the requirement that is more stringent.
The APB Ethical Standards can be downloaded from the APB website.