Accounting is not just a game of numbers. It is also about maintaining precision, transparency, accuracy, and withholding integrity at the highest level. Some of the biggest accounting scandals are based on the foundation of conscious or unconscious audit issues. When there are key issues in the audit report of a business, this impacts them at multiple levels – it shakes trust among stakeholders, reputation is jeopardized, operations face disruption, and firms face penalties and legal impacts due to non-compliance.
The impact of incorrect audits is the worst on MNCs. Internal and client audits are one of the key functions these big corporations perform and hence, it is of utmost importance to maintain objectivity and integrity. Audit independence enables this.
What does Audit Independence mean for MNCs?
It refers to the absence of influence, interest, or relationship that could impair an auditor’s objectivity – both internal and external. What it means is that the auditors must be free from any conflict of interest that could compromise their ability to perform an impartial audit. Independence is crucial not only in appearance but also in fact. The auditors should be both independent in reality and perceived as independent by the public.
There are two key aspects to audit independence:
- Independence in Fact: The auditor should be able to perform an audit objectively, and be free from any relationships, financial interests, or biases that could affect their judgment.
- Independence in Appearance: This has more to do with what appears to others, the perception of the auditor’s independence by third parties, such as investors, regulators, and the general public. Even if an auditor is independent in fact, if they are perceived as being influenced by a client, their audit may be considered compromised.
Key strategies to maintain Audit Independence for MNCs
Many challenges emerge when it comes to auditing, especially if it is internal. Auditors could be close to the leaders, or they could have financial dependence on the clients. The firms could also lack audit services altogether or there could be pressure from the management. But the strategies below can help overcome these challenges:
Establish Firm-Wide Policies:
MNCs have complex structures and operations. They need to establish comprehensive policies that showcase the importance of audit independence and lay down the procedures for maintaining it. These policies should be communicated to all employees and should be regularly reviewed and updated.
Regular Independence Training:
This is especially relevant for teams who deal with the audit work. Continuous training on the importance of independence and the identification of threats is essential. This helps auditors recognize potential conflicts of interest and understand how to mitigate them.
Rotation of Audit Partners:
Regular rotation of audit partners is an effective strategy to mitigate the familiarity threat. By rotating audit partners every few years, firms can ensure that fresh perspectives are brought to the audit process.
Limiting Non-Audit Services:
To avoid conflicts of interest, MNCs should consider limiting the provision of non-audit services to their audit clients. Similarly, they can also establish clear boundaries between audit and non-audit teams to ensure that independence is not compromised.
Monitoring Independence Compliance:
In the world of accounting, compliance is a key component at all levels, especially when the goal is to maintain independence and autonomy. From tracking financial relationships, reviewing non-audit service engagements, and ensuring that all employees understand and adhere to independence rules – these corporations should have a monitoring process in place.
Encouraging a Culture of Integrity:
Integrity is a crucial part of firms dealing with hard numbers. In MNCs, the team sizes are often quite big, making it impossible for the leaders to keep track of everything that is going on with the teams. Fostering a culture of integrity within the firm is crucial. This involves promoting ethical behavior, encouraging transparency, and ensuring that all employees understand the importance of independence in auditing.
Outsourcing your audit:
No matter how much you try, if the audit is in the hands of internal team members, there is always a chance of partiality. By engaging external members and hiring a team of professionals through outsourcing, MNCs can gain an objective assessment and identify areas where improvements are needed. This also reduces unnecessary workload during the audit season, thus helping maintain the productivity and efficiency of the teams.
The Role of Outsourcing in Audit Independence
Over the past few years, outsourcing has proven to be a key business strategy that helps MNCs maintain audit independence. These teams can help MNCs minimize potential conflicts of interest that arise from offering both audit and consulting services to the same client. For instance, outsourcing routine tasks such as tax preparation, payroll processing, or IT services allows the firm to focus exclusively on the audit engagement without the risk of compromising independence.
Outsourcing also adds a layer of objectivity and transparency. Outsourced teams are external to the firm, and are not influenced by the close relationships that might develop between an auditor and their client over time. This external perspective can enhance the impartiality of the audit process, reinforcing the firm’s commitment to independence.
Moreover, outsourcing audit procedures to teams of experts can bring in fresh expertise and perspectives, reducing the risk of familiarity threats and ensuring that audits are conducted with a high level of objectivity. By strategically utilizing outsourcing, accounting firms can strengthen their audit independence, protect their integrity, and continue to deliver reliable and unbiased audit reports.
Want to know how outsourcing can help? Write to us at connect@finsmartaccounting.com.
Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
