Possible Threats against Auditor Independence

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Local Authority Pension Fund Forum

The Local Authority Pension Fund Forum (LAPFF) is a voluntary association for authority pension funds based in the UK. As a result of the recent financial crisis members of the LAPFF have lost confidence in the audit function. Despite the serious weaknesses of UK and Irish Banks the auditors provided a clean audit report which in turn has led to mem-bers of the LAPFF losing their investments (LAPFF, 2010).
The LAPFF does not support the idea of a third party, such as a regulator, to decide on auditor’s appointment and remuneration; they believe this a fundamental right of share-holders. The LAPFF agrees that there is a conflict of interest in the auditor being appoint-ed and remunerated by the company itself but believes this conflict is eliminated through good corporate governance (LAPFF, 2010).
The LAPFF supports the idea of mandatory rotation of audit firms and recommends a ro-tation after five years, audit engagement that are longer than ten years should be avoided according to the LAPFF (LAPFF, 2010).
The LAPFF also supports a ban of non-audit services from being offered to audit clients. They recognize the conflict of interests that arise from the provision of non-audit services and strongly advise their members to oppose auditors who receive more profit from non-audit services than from the audit services (LAPFF, 2010).

Proxinvest & ECGS

Proxinvest is a French proxy voting advisory company. Proxinvest provides its services to investors only, services such as voting recommendation and guidelines. ECGS, European Corporate Governance Service, is a joint venture of local market experts. They provide consultation services similar to Proxinvest (Proxinvest & ECGS, 2012). The reply was made in French, translation into English can be found in appendix 1.2.
Proxinvest and ECGS believe there is a conflict of interest in the auditor being appointed and remunerated by the audited company. They believe the auditor should be appointed by an independent audit committee and for the selection to be unanimous. In the case where the independent audit committee is not unanimous a third party such as the, Authority of financial markets, should be responsible for appointing the auditor. So Proxinvest and ECGS support the idea of a third party being responsible for appointing and remunerating the auditor (Proxinvest & ECGS, 2010).
Proxinvest and ECGS support mandatory rotation of audit firms and believe that an audit engagement should not last more than five years. They also believe non-audit services should be prohibited as the conflict of interest is too clear. Proxinvest and ECGS believe the prohibition of non-audit services is an essential measure to strengthen auditor inde-pendence and would want the prohibition to apply to all industries (Proxinvest & ECGS, 2010).

Railpen Investments

Railpen Investments manage the assets of the Railways Pension Trustee Company and works as a corporate trustee for several UK railway pension funds (Railpen Investments, 2010a).
Railpen Investments acknowledge that there might be a conflict of interest in the auditor being appointed and remunerated by the company itself. They do however not support the idea of a third party, such as a regulator, being responsible for appointment and remunera-tion of the auditor. In the UK shareholders have the power to approve or decline the ap-pointment of an auditor at the annual general meeting. Shareholders are however not a part of the selection process and it is very rare that a proposal of an auditor has been declined by the shareholders. An alternative approach as explained by Railpen Investments to elimi-nate or at least reduce the conflict of interest is to increase the role of shareholders. The appointment of the auditor is a fundamental right of shareholders and Railpen Investments strongly oppose the idea of transferring this power to a third party. Railpen Investments recommends the Commission to make sure that shareholders have the last say in the ap-pointment and remuneration of the auditor as this is not the case in all member states. Railpen Investments also stresses the importance of better disclosure; they suggest a mini-mum standard of disclosure so that shareholders can make well-informed decisions (Rail-pen Investments, 2010b).
Railpen Investments recognize that long audit engagements over decades may create an audit-client relationship which may impair auditor independence. They do however not support mandatory rotation of audit firms. Railpen Investments believe mandatory rotation of audit firms may harm audit quality as during the first few years of an audit engagement there is a higher risk of errors or frauds taking place. Similar to question 16 and 17 Railpen Investments stresses the importance of better disclosure, they believe an alternative ap-proach to trigger rotation of audit engagements would be for the company to justify a long audit tenure. An example would be for a company and their audit committee to explain why an audit engagement after around 10 years is extended. If shareholders do not find the explanation sufficient to justify an extended audit engagement then they have the right to demand rotation of the auditor (Railpen Investments, 2010b).

READ Substantive Equality & Inadequate Social Transformation

1 Introduction
1.1 Background
1.2 Problem Discussion
1.3 Research Questions
1.4 Purpose
2 Review of Literature .
2.1 History of the Audit Profession
2.2 The Concept of Auditing
2.3 The Auditor’s Role .
2.4 Independence
2.5 Possible Threats against Auditor Independence
2.5.1 The Swedish “Analysmodellen”
2.5.2 Non-Audit Services
2.5.3 Mandatory Rotation
2.6 Green Paper
2.6.1 1996 Green Paper .
2.6.2 2010 Green Paper
2.7 Rules and Regulations
2.7.1 Directive on Statutory Audit
2.8 Recent Proposal on Reform of the Audit Market
2.8.1 Mandatory Rotation of Audit Firms:
2.8.2 Prohibition of Non-Audit Services: .
2.9 Importance of Shareholders .
3 Method .
3.1 Choice of Subject .
3.2 Research Design
3.2.1 Research Approach
3.2.2 Descripto-Explanatory Research .
3.3 Data Collection .
3.3.1 Qualitative Study
3.3.2 Secondary Data .
3.3.3 Selection of Questions .
3.3.4 Selection of Replies .
3.4 Quality Assessment .
3.4.1 Reliability .
3.4.2 Validity
3.4.3 Generalization
4 Empirical Findings
5 Analysis
6 Conclusion
Bibliography