The independence of the independent, or external, auditor is an essential component of the audit relationship. It is fundamental to the independent auditor’s accountability to the audit committee, the performance of the audit and the confidence investors may place on the auditor’s report.

At least annually, and prior to the issuance of the auditor's report, the auditor should provide a letter to the audit committee that:

  • discloses to the audit committee, all relationships between the auditor and his or her related business or practice and the entity and its related entities that, in the auditor's professional judgment, may reasonably be thought to bear on the auditor’s independence;
  • confirms the auditor's independence with the audit committee; and
  • disclose to the audit committee the total fees charged for audit and non-audit services provided by the auditor.

A candid dialogue on independence issues should take place between the audit committee and the independent auditor. Audit committees should make it clear that the independent auditor must not refrain from disclosing to the committee any matter that could bear on the auditor's independence solely because the auditor has concluded that his or her independence is not impaired. The onus is on the independent auditor to bring to the committee all matters that pose a potential threat to his or her independence while the audit committee is entitled to know, and should ask, about all matters that might have a bearing on the auditor's independence. If the auditor has judged a matter as one that does not imperil his or her independence, the audit committee should ask the auditor to explain the reasons for such a judgment.

Audit committees are not responsible for forming a conclusion regarding the independent auditor's independence. That is auditor’s responsibility. The audit committee's responsibility is to ensure that this conclusion has been reached in a professional and rigorous manner, taking into account all factors that affect the auditor's independence, and that the conclusion appears reasonable in the circumstances.

Audit committees must clearly understand the benefits and any potential threats that may arise when the independent auditor has a broad-based professional service relationship with the company that is not restricted to providing services that are narrowly defined to statutory auditing. The most obvious benefit relates to management's ability to use the external audit firm's specialized expertise to solve problems and improve operating efficiencies, tax planning, financing, risk management and control effectiveness. Auditors with a broad-based service relationship are able to develop a much deeper and more comprehensive understanding of their client's business, management structures, ethical culture, systems, principal business risks, controls and operating practices. Such knowledge increases the likelihood of the auditor detecting material errors in the accounting records or financial statements. The most significant threats to auditor’s independence arising from non-audit fees are the relative revenues weight and the closeness created by these additional services. These real or perceived threats may be mitigated by appropriate firm’s policies and communications. For example, significant non-audit services should be pre-approved by the audit committee and disclosed in the entity’s public filings. Separating completely the engagement teams will also reduce the potential risk arising from this closeness between management and the audit firm.

Deloitte Publications