An auditor is an independent party that examines a company’s financial statements. The primary purpose of this process if them to provide an unbiased opinion related to those statements. Similarly, this opinion also comments on the auditor’s work performed through the audit report. This report helps the users of those financial statements make well-informed decisions.
The work that auditors perform must be reliable and usable. For that, auditors must be independent and unbiased from the client’s matters. However, there are several threats that they may face during the process. These threats can significantly hinder the tasks that auditors perform or the opinion they provide. However, there are several safeguards that auditors can take to tackle these threats.
There are five critical threats that auditors may face during their work. These include self-review, self-interest, familiarity, intimidation and advocacy threats. Each of these may arise from different sources. Primarily, however, these come from the relationship between auditors and the client. One of these threats that come from the client’s side is the intimidation threat to auditors.
What is the Intimidation Threat to auditors?
Auditors must provide an unbiased and objective opinion as independent examiners. Sometimes, however, the client’s management may not allow that. Intimidation threat to auditors arises when there is an actual or perceived pressure from the client. This pressure may influence the auditor’s decisions and impact their opinion or work.
Intimidation threat to auditors also arises when the client attempts to exercise undue influence over the auditor. This undue influence may cause the auditors to provide a biased or unobjective opinion. In these cases, the auditors may find themselves helpless against the client’s threats or attempts. Like any other threat to an auditor’s objectivity, this threat has various safeguards. However, these safeguards may not be applicable every time.
The intimidation threat stems from the client having a higher position of 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.
Overall, the intimidation threat to auditors arises when clients use their position to impact 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.
How Does the Intimidation Threat to auditors work?
The intimidation threat to auditors may arise from various circumstances. Some of the most common situations in which this threat may exist are as below.
- The auditors have a fee dependency on a client. Usually, this occurs when revenues from a specific client constitute a large portion of an audit firm’s income.
- A member of the audit team has personal relationships with the client or its management. This threat may also fall under the familiarity threat sometimes.
- An audit partner joins the client. The audit partner may still influence the audit firm, thus, giving them an upper position.
- The audit firm and client are involved in litigation. It may be existing litigation or threats related to future cases.
The intimidation threat arises when the client’s management attempts to intimidate or threaten the auditor. However, these threats must be material enough to influence the auditors’ work. Similarly, auditors must believe these threats may compromise their objectivity and independence. In these circumstances, auditors may contemplate further actions to take.
Intimidation threats may occur due to several factors. Sometimes, the threats may be significant, while in other cases, they may be lower. In most circumstances, auditors may use safeguards against the intimidation threat to auditors to avoid risks. Sometimes, however, the threats may be substantial, or those safeguards may not work. Therefore, auditors may avoid the audit altogether.
What are the safeguards to the Intimidation Threat to auditors?
Auditors can use similar safeguards for the intimidation threat to auditors as other threats. Usually, the level of these threats will differ from one assignment to another. Auditors must contemplate the issues during each engagement and make decisions accordingly. However, most of these 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 exist, auditors will consult the team to find safeguards against them. If the intimidation stems from a specific event, auditors will seek to avoid it. If these threats arise due to an audit team member, the firm will remove them from the team. In most circumstances, auditors will consider the appropriateness of modifying their audit plan. Simi
Usually, auditors obtain the services of experienced members to deal with intimidation and other threats. Auditors may also involve additional individuals from outside the team for an objective view. In case the intimidations are substantial, auditors may consider alternative actions. Performing quality control reviews can also signify any issues with the engagement. Sometimes, however, using safeguards may not be possible.
For some intimidation threats, safeguards may exist. However, the significance of those threats may render those safeguards useless. In some circumstances, regulations and standards may not allow the use of potential safeguards. During these situations, auditors may need to leave the engagement or else it will compromise their judgement.
An audit firm, ABC Co., audits the financial statements of a company, XYZ Co. During the first year of the audit, ABC Co. provides an adverse opinion on the company’s financial statements. The company does not agree with their evaluation. However, it does not refute the audit report. Their relationship continues to the next year where complications arise.
During the second year audit, the auditors find some questionable transactions due to the accounting treatment. They consult the client’s management but do not receive an acceptable answer. Therefore, the auditors disagree with the accounting treatment for those transactions. However, the client’s management does not change their stance on those transactions.
Due to the fear of a qualified or adverse report, the client’s management threatens ABC Co. with litigation. It claims the previous year’s audit report contained an incorrect opinion. The management threatens ABC Co. with litigation 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 the manager and the partner for the engagement. All members involved believe XYZ Co.’s accounting treatment for the transactions is unacceptable. However, the threat from XYZ Co. 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 contemplate various safeguards against the threat from XYZ Co. However, none of the safeguards applies to this scenario due to the significance of the matter. Therefore, ABC Co. cannot reduce the threats to an acceptable level or eliminate them. Based on the risks involved and the available options, ABC Co. resigns from the engagement.
Auditors face various threats to their objectivity and independence. The intimidation threat is when the client uses its leverage position to threaten or influence auditors. Usually, auditors can use safeguards against this threat to eliminate or reduce it to an acceptable level. However, that may not always be possible. In these circumstances, auditors must decline or resign from the engagement.