- This topic has 4 replies, 3 voices, and was last updated 11 years ago by
.
- Posts
Contingent fee is an advocacy or self interest threat?
And
An example would be where the audit firm PROMOTES THE SHARES IN A LISTED COMPANY or supports the company in some sort of dispute.What does it mean?
Thanks
That example would be an advocacy threat.
Advocacy meaning that one’s relationship to the client is too close so the auditor could be making decisions for the client and representing the client to third parties making objectivity difficult.
Contingent fees pose the threat that if the outcome is other than required then the auditor will lose out. For example, no fee if you do not get a clean audit report would make the auditor unwilling to give an adverse opinion where one may be warranted.
The threat to the auditors objectivity in such instance would be self interest (loss of fee’s if they give the appropriate decision) and possibly advocacy (assuming a management role in making decisions for the client).
Can’t remember now when Management was dropped as one of the threats to objectivity but it was dropped because of its closeness to Advocacy so thats a good way of remembering that advocacy is assuming managerial responsibility over a client.
HTH,
Shaun.
I don’t think that management has been dropped as a threat. For example, auditors are not supposed to get involved with recruiting staff for clients or, if they attend board meetings they have to be careful not to begin to act as directors.
Advocacy is really where you promote the company to third parties, such as investors.
Hi Gromit,
completely agree and I for one can see the difference but, where it used to be specifically mentioned seperately in the IFAC code of ethics (specifically but not restricted to sections 100.12, 200.3 and 300.7) it disappeared.
I vaguelly recollect something in a Kaplan study text around the time of the disappearance explaining the reasoning being due to the similarity of management and advocacy.
Certainly even though now subsumed within advocacy I think that students would be well advised to continue to consider it seperately as I for one still see advocacy and management as quite distinct.
kind regards,
Shaun.The IFAC code seems a bit inconsistent. True, management isn’t listed initially, but in Part B, para 290.165 the guide states:
“If a firm were to assume a management responsibility for an audit client, the threats created would be so significant
that no safeguards could reduce the threats to an acceptable level. For example, deciding which recommendations of the firm to implement will create self-review and self-interest threats. Further, assuming a management responsibility creates a familiarity threat because the firm becomes too closely aligned with the views and interests of management. Therefore, the firm shall not assume a management responsibility for an audit client.”So this seems to elevate management activities back up to a threat level albeit those threats might be manifested through advocacy, self-review and familiarity.
As you say, I think it’s best for students to still keep management threats explicit in case they are overlooked in answers.
- You must be logged in to reply to this topic.