Companies Hiring Former Independent Auditors
Should companies be allowed to hire individuals who formerly served as their independent auditors? Discuss the pros and cons of this practice.
Companies that hire CPAs and other accounting professionals are always looking to safeguard themselves from audits and preventing misstatements. Companies look for professionals in accounting to safeguard their companies from fraud. A very common instance is a company is audited provided services by a CPA firm and then tries to hire one of the independent auditors away from the CPA firm. These professionals will become the internal auditors of the company and be hired to prevent material misstatements and watch for fraud schemes that may be open in the company’s way of business. Hiring an independent auditor will help to safeguard against fraud as long as that professional follows simple rules of conduct.
Individual auditors must maintain a state of independence within their field of practice at all times. There are two types of independence that apply to auditors: independence in fact and independence in appearance. Independence in fact means that the auditor is actually independent of the situation. Independence in appearance means that the auditor in a situation appears to be independent from third parties. Independent auditors strive to maintain a high level of independence to keep the confidence of users relying on their reports to be high. When a company hires an independent auditor the independence in appearance may be in jeopardy because of the direct interest of the former auditor. The professional has a direct investment in the company since the company now pays that individual’s salary or their wages. To maintain independence once an employer-employee relationship is created many report directly to the president, another high executive officer, or the audit committee of the board of directors.
Many independent auditors become CEOs, CFOs, or internal auditors of once served companies. After an auditor works on an audit or provides other services with their CPA firm they become more familiar with a company’s way of business. The company hires the independent auditor away from CPA firm to hire a professional. A professional has a responsibility for conduct that extends beyond their individual responsibilities and beyond the requirements of our society’s laws and regulations. Even though the auditor may be certified as a public accountant does not mean that they are a professional. An auditor may jump ship from a CPA firm just to see an increase in salary or many other reasons. The company cannot assume that the person they are hiring is a professional because they practiced as a professional under the CPA firm. The person is not automatically classified as a professional in whatever position they place them in their organization.
Assumptions are needed in order to take a risk and hire any individual into a company. Every company hires employees based on assumptions on their individual pressures, opportunities they are going to have in the company, and rationalizations of individual decisions that person will make. The risk in hiring an independent auditor is one to reduce the information risk presented on the company’s financials. The independent auditor will be experienced in reducing information risk. This experience will provide the company with a resource in any position that the auditor is hired to take place in.
The auditor has much experience in all business fields. If hired they could provide insights to many areas of the company. While being able to provide many insights they may know the inside part to perpetrating a fraud. The idea of the fraud triangle and analyzing the pressures, opportunities, and rationalization of the auditor hired comes to mind. The idea of continued improvement from switching from analyzing the financial position of the company to making the company’s financials look better may be a big difference. Whether they would be reporting to higher authority on controls of the company and analyzing the company’s position regularly to making the companies better as a whole the pressures and opportunity would vary for each individual. Most of the top level fraud schemes come from those persons that know the ins and outs of the company. They may know how to cook the books or be a smart thief from the company when the opportunity is present. The risk of hiring one that will do such things is present with hiring any individual.
The opinion given by the CPA firm on the company may come in to play on hiring one of the independent auditors. For example, if the firm gave a clean, unqualified opinion where material misstatements were not present the auditor may be offered a position in the company being audited. The benefits of being hired by the company should not affect whether a position of advancement is offered or not. This would be considered a conflict of interest in the company and the integrity and objectivity of the auditor would be in question. On the other hand, if an unqualified with explanatory paragraph or qualified opinion was given and the company offered the auditor a position to prevent irregularities in future periods may be okay. The reason behind offering a position to the auditor may be in question in determining whether it will be acceptable to offer or accept the position.
In the Crazy Eddie case, the auditor of the company was a close relative to the president of the company. The relation to an upper executive and the reason for being hired can place a strain on the employer-employee relationship. In Crazy Eddie’s case, the brother of Crazy Eddie was the accountant and went to college just to know the ways of cooking the books. If a company hires an auditor with an alternative motive then the relationship should not be allowed.
The independent auditor being hired should follow the American Institute of Certified Public Accountants (AICPA) Code in accepting a position with a once served company. This means that they should be independent in the professional services they provide. They should also have integrity and objectivity in their performance and be free of conflicts of interest. All general standards and compliance with those standards should be followed just as if a reasonable auditor or CPA would be in the position. Among these rules of conduct that the auditor should follow when and being hired they should act as a reasonable, judgmental person would act.
AICPA. “AICPA Code of Professional Conduct.” June 2007. 30 June 2008. http://www.aicpa.org/about/code/index.html
Arens, A., Elder, R., and Beasley, M. Auditing and Assurance Services. Pearson Education 12th Edition 2008