The role of the auditor is not well understood among not-for-profits, particularly smaller ones. It’s often not practised well either. One issue is the blurring of the roles of auditor and accountant.
The purpose of an audit is to ‘enhance the degree of confidence of intended users in the financial report’[i].
So the subject of an audit is a ‘financial report’, in this case the financial report of your not-for-profit. And the audit serves the ‘intended users’ of your report. Who are they? Well their role is more than to just to use the report; they are the reason for the existence of an audit: “The intended users are the person, persons or class of persons for whom the assurance practitioner prepares the” audit report.[ii] For you this will normally be your members (or, if none, the group on whose behalf the board governs).
So the auditor works for the members, not the board or committee (and certainly not the CEO).
But an audit is a three party relationship. In addition to the auditor and the users the other party is what the accounting profession calls ‘the responsible party’. Responsible for what? Responsible for the financial report:
The financial report subject to the audit is that of the entity, prepared by management of the entity with oversight from those charged with governance…The audit of the financial report does not relieve management or those charged with governance of their responsibilities.[iii]
Now we can see why the users need their degree of confidence in the financial repot ‘enhanced’ – the report is prepared by those running the organisation, and there are incentives at work there that mean that it is wise to check on their work.
If you want an opinion on whether somebody has done something correctly or not, I suggest that you would, even without any knowledge of professional ethics, ask somebody completely unconnected with the task. And the law reflects this.
So the members engage (invariably under a requirement of the legislation under which they are incorporated) someone who is independent of management – you’ve probably heard the term ‘independent auditor’ – to give them an opinion on the financial report produced by their leaders. It is this opinion that gives them the ‘enhanced’ confidence in the report:
This is achieved by the expression of an opinion by the auditor on whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework.’[iv]
Many not-for-profit governing bodies do not have professional accounting expertise on tap to help them with the preparation of the financial report – indeed even with the prior step of choosing a ‘financial reporting framework’. So it is natural that they turn to their auditor for help.
In most cases the rules of the not-for-profit (either its incorporation legislation or its constitution) will specify that the auditor has to be a member of one of the three professional accounting bodies, CPA Australia, The Institute of Chartered Accountants in Australia, or the National Institute of Accountants.
Such an auditor is bound by a code of ethics.[v] Reasoning from a professional accountant’s overriding duty to act in the public interest, and from that to the fundamental principles of integrity and objectivity, the Code says that it is necessary for him to be independent of his client. This is irrespective of the type and size of not-for-profit – ‘an audit is an audit’, as the profession says.
You can therefore see that if the auditor helps you with the accounting this is a threat to his independence, and therefore a threat to the value of the check on behalf of the members. He will be partly checking his own work.
Whether or not the auditor should decline the audit engagement depends on firstly, his evaluation of the significance of the threat and, secondly, whether or not he can apply safeguards to either eliminate the threat or reduce it to an acceptable level.
The issue of independence is so critical to the reputation of professional accountants, particularly auditors, that the accounting bodies (see above) have issued an Independence Guide.[vi] This guide makes it clear that, while it may be OK for an auditor, by segregation of duties within the audit form, to prepare ‘the books’ for a client, it would be much harder for an auditor to legitimately advise you on what accounting policies you should adopt. The significance of this threat to independence is greatly increased if, as is the case with many not-for-profits, management has little knowledge of generally accepted accounting principles and the Australian Accounting Standards. They would be relying almost entirely on the auditor’s opinion, an opinion that the auditor that would then have to audit.
Therefore it is best for you to follow the principle that an auditor is for auditing, not accounting. And if your auditor doesn’t see a problem where there is one, take the initiative and find another auditor. (And, if you are forgiving, continue to use the current auditor for accounting advice.)
[i] Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards,Auditing and Assurance Standards Board, October 2009, paragraph 3).
[ii] Framework for Assurance Engagements, Auditing and Assurance Standards Board, April 2010, paragraph 27.
[iii] ASA 200, paragraph 4.
[iv] ASA 200, paragraph 3.
[v] Compiled APES 110 Code of Ethics for Professional Accountants, Accounting Professional & Ethical Standards Board (APESB), 2012.
[vi] Joint Accounting Bodies, 4th edition, February 2013.