Independence

 

What does “independent”  mean? 

As it applies to auditing, independence means the freedom from impairment to objectively conduct procedures and report on findings from the work.   This involves independence of mind and appearance, and lasts for the duration of the professional relationship.  It’s easy to understand that “you can’t audit your own work.”  There can be other impairments to independence as well, including having a financial interest in the outcome of an audit. 

 

Who decides what’s “independent”? 

The Yellow Book has an excellent, readable section on independence.  Many certifying bodies for auditors have their own determination of “independence.”   The DFCM Final Rule requires that filers who are required to obtain an independent audit of their due diligence process “certify” that they did so.  Stakeholders have slightly different interpretations for “independence”; the filer should agree to this concept with the IPSA Auditor before beginning an engagement. 

 

Will the SEC decide or approve who is “independent”?

There is no provision in the final rule for the SEC to weigh in on the independence of the IPSA Auditor.  There is no information on this issue in SEC FAQs at this writing.  In many of SEC’s other decisions on DFCM, the SEC has deferred to the users of the information to make interpretations. 

 

If an auditor (or their firm) has audited a smelter in the supply chain, are they independent for purposes of the DFCM audit? 

Perhaps.    We would encourage filers to consider the facts and circumstances for each case, both for actual conflict and the appearance of a conflict of interest.  This could include:  the degree of the filer’s reliance on the smelter audits for their own due diligence; the number of smelters audited; who the auditors were; the extent of revenues (for the smelter audits or their IPSA Auditor business); the risks to the auditor (or their firm) if the smelter audits are unsubstantiated or incorrect; or other factors.  The filer is free to make these determinations.   We suggest that the filer should also be prepared to answer questions that could arise from users of the IPSA Audit report.  

 

We’re talking about conflict minerals – now you’re talking about “conflicted auditors”!  How could a conflict of interest occur for a IPSA Auditor?

The conflicts could be financial, such as if the auditor owned (or purchased) shares of your stock, based upon their impressions gained during the IPSA Audit.  The conflicts could be reputational, such as if the auditor (or their firm) had a significant role in designing the framework for aspects of the due diligence that the filer relies upon.   The Yellow Book specifies that independence comprises independence of mind and appearance. 

 

What does DFCMaudit.com consider to be “independent”? 

DFCMaudit.com follows the guidelines of the Yellow Book.  We impose additional independence requirements: 

• The IPSA Auditor or direct relatives (spouse, dependent children) may not own stock in any company they audit.  The restricted time frame begins when the engagement begins, and continues through the end of the reporting period after the one covered by the audit.  For example, the IPSA Auditor for calendar year 2013 would be restricted from purchasing the audit client’s stock through the end of calendar year 2014.
  
  
• The IPSA Auditor or direct relatives may not be an employee of the audit client on a full-time or part-time basis.
  
  
• If the IPSA Auditor has performed other contract work for the IPSA Audit Client within the reporting period, it may not account for more than 10% of the audtor’s revenues in that period [exclusive of the IPSA Audit].  The other contracted work may not have included effort subject to the IPSA Audit.