Intimidation Threat to Auditor and Related Safeguards

An auditor is an independent party that review a company’s financial statements and provide opinion. The main purpose of this process is  to provide an unbiased opinion related to financial statements. This opinion also comments on the auditor’s work performed through the audit report. Audit report helps the users of financial statements make well-informed decisions regarding to company assessment.

The auditors’ work must be reliable and usable. Auditors must be independent and unbiased from the client’s work. However, there are several threats that can impact the auditors’ independent. These threats can significantly impact tasks that auditors perform or the opinion they provide. However, there are several safeguards that auditors can take to prevent such threats.

There are five critical threats that can impact auditors during their work. These include self-review, self-interest, familiarity, intimidation and advocacy threats. Each of these may arise from different reasons. Primarily it may come from the close relationship between auditors and the client. Intimidation is the threats that come from the client’s side and it threat to auditors.

Intimidation threat to auditors also arises when the client attempts to exercise  influence over the auditor. It may cause the auditors to provide a biased opinion. so the auditors may find themselves unable to go against the client’s threats or attempts. Similar to any other threat to an auditor, it has various safeguards. However, these safeguards may have its limitation as well.

The intimidation threat raise from the client having too much influence. Usually, these situations arise when the client has leverage over the auditor. For example, a client may threaten the auditor with litigation due to their past relationship. The primary purpose of these threats is for the client to influence the auditor’s judgement or decisions.

The intimidation threat to auditors happen when clients use their position to influence auditors’ work. With this threat, auditors usually have a lower hand and come under the client’s influence. As mentioned, this threat may include actual or perceived actions. In some circumstances, auditors may control the intimidation threat through safeguards. However, it may not be possible every time.

  • The auditors have a fee dependency on a client. Usually, this occurs when revenues from a client constitute a large percentage of an audit firm’s income in the year.
  • A key member of the audit team has personal relationships with the client or its management. This threat is also fall under the familiarity threat sometimes.
  • An previous audit partner joins the client. Ex audit partner may still influence the audit firm, thus, giving them an upper position.
  • The audit firm and client are involved in a legal case. It may be existing litigation or related to future cases.

The intimidation threat arises when the client’s management attempts to  threaten the auditor. The threat must be material enough to influence the auditors’ work. auditors believe these threats have compromised their objectivity and independence. In these situation, auditors need to take further .

There are many situation that Intimidation threats may occur. The threats may be significant, while in other cases, they may be lower. In most situation, auditors need to use safeguards against the intimidation threat to avoid risks. However, the threats may be substantial and those safeguards may not work. Therefore, auditors chose to stop the engagement.

Auditors may use similar safeguards for the intimidation threat as other threats. Usually, the level of these threats will differ from one assignment to another. Auditors must contemplate the threate during each engagement and make decisions accordingly. However, The safeguards involve not providing the client with a leverage position.

The safeguards to intimidation threats will differ from one circumstance to another. When these threats happen, auditors need consult the team to find the best safeguards against them. If the intimidation stems from a specific event, auditors will seek to avoid it. If these threats arise from an audit team member, the firm must remove him from the team. In most circumstances, auditors will consider to modify their audit plan.

Auditor need to discuss with experienced members to deal with intimidation and other threats. Auditors could involve additional individuals from outside the team for view. In case the intimidations are substantial, auditors may consider alternative actions. Audit team need to ask for Performing quality control reviews to detect any issues with the engagement. Sometimes these safeguards may not be possible.

Only a small intimidation threats which can be solved safeguards. However, the significance of those threats may cause those safeguards useless. In some circumstances, regulations and standards may not allow the use safeguards but to end the work. In these situations, auditors need to leave the engagement or it will compromise the work.

Example

An audit firm audits the financial statements of a company ABC. During the first year of the audit, auditor provides an adverse opinion to financial statements. The company does not agree with the opinion, but accept the report. They continue the work to the next year where complications happen.

In the second year, the auditors find some material transactions due to the accounting treatment. They talk with client but do not receive an acceptable answer. Thus, the auditors disagree with the client treatment. However, the client’s management does not change their stance on those transactions.

Due to the fear of a qualified report, the client’s management threatens the auditor. with litigation. It claims the previous year’s audit report contained an mistake. The management threatens if the firm does not agree to the accounting for those transactions. In this circumstance, the audit team members feel the client using leverage to influence their work.

The audit team consults with manager and audit partner. All members believe ABC accounting treatment is unacceptable. However, the threat from ABC is also substantial and includes significant risks. Although ABC Co. stands by its original opinion, it does not prefer the litigation process.

The team members find various safeguards against the threat from ABC. However, none of the safeguards applies to this situation due to the significance of the matter. Auditor cannot reduce the threats to an acceptable level. Based on the risks involved and the available options, auditor resigns from the engagement.

Auditors face difference threats to their objectivity and independence. The intimidation threat happen when the client uses its leverage position to threaten auditors. Auditors still can use safeguards against this threat to eliminate or reduce it to an acceptable level. If the safeguards are not effective, auditors must decline or resign from the engagement.