threats to professional ethics

It is certainly not the directors. AUditors are appointed by the shareholders and report to the shareholders, so strictly the shareholders as a body are the client. In effect this means that the company is their client and if, for example, the auditor had been shown to be negligent so that the company lost money, the company could sue.

Here the word ‘client’ is being used to mean any party relating to the company being audited. Think of auditor’s side and client’s side. So:

If the auditor owns shares in the company being audited there is a threat because the auditor will want the company to appear to do well.

If the auditor is the sister/brother of the finance director there is a threat – you want to stay friends!

If the auditor is the brother/sister of a major shareholder there could be a threat because that person will want to share price to go up.

It is the auditor supporting, praising or recommending a client. In a court of law, your advocat speaks in your defence and will obviously put emphasis on the positive aspects of your behaviour and probably ignore the negative ones.

Auditors have to be careful not to stray into becoming non-objective. So, if a client asked the auditor to help with a loan application to a bank, the auditor could examine the client’s budgets and, if happy, could sign a limited report (nothing has come to our attention that suggests the budget is wrong). That is being objective.

However, if the auditor were to attend a meeting between the bank manager and teh client and began saying what a good the client’s plans and prospects are, then the auditor is straying into areas which are too judgemental.

If after the auditor has given a glowing recommendation the client has disappointing results, the auditor faces embarrassment at having got it wrong. This can put pressure on the auditor to ‘talk up’ teh financial results rather than taking an objective view.