PCAOB shares best auditor independence practices

The Public Company Accounting Oversight Board staff released best practices recommendations pertaining to auditor independence. 

Auditor independence—the obligation of auditors to function as objective, impartial third parties—is crucial to maintaining quality control at a firm. However, it is an area of common deficiencies every year, according to PCAOB inspections. The PCAOB staff observed an increasing number of comment forms related to independence issues in all inspection categories over the last three inspection periods, from 2021 to 2023. 

Courtesy of PCAOB

The PCAOB staff recommends the following practices:

• Increasing the use of technology-based tools: Some audit firms increasingly use technology-based tools to promote early detection of potential personal independence violations.
• Enhancing the frequency of personal independence representations.: Certain audit firms have increased the frequency for personnel to provide independence compliance representations on a quarterly or semi-annual basis. Also, to enhance the process, certain audit firms have tailored the representations based on their personnel's financial interests and/or services provided to audit clients.
• Enhanced processes: Certain audit firms employed an enhanced process that includes mandatory meetings with firm personnel skilled in independence matters to guide personnel through their financial holding disclosures, and those of close family members, to ensure proper considerations are given to reporting all financial holdings. 
• Establishing disciplinary actions: Audit firms have put in place specific policies and procedures providing sanctions for personal independence policy violations, including failure to timely complete semi-annual or quarterly personal independence representations. The procedures include audit firms assessing the severity, frequency and nature of personal independence policy violations and determining disciplinary actions commensurate with the violations.
• Use of templates: Using a global template with standardized language for all audit engagement letters for clients subject to SEC and PCAOB independence standards and rules. This template has helped prevent the inclusion of indemnification clauses, contingent fees and other prohibited fees or services in the engagement letters of "other auditors."

The PCAOB report also provided reminders for auditors and audit committee considerations.