Auditor Independence

Executive Summary

Auditor independence is one of the core principles of the auditing profession. Independence means that auditors must remain objective and free of conflicts of interest when performing an audit.

For nonprofit audits, independence is especially important because many stakeholders rely on audited financial statements, including donors, board members, and regulators. If independence is impaired, the reliability of the audit opinion may be affected.

Understanding the Independence Requirement from SAS No. 146

SAS No. 146, Quality Management for an Engagement Conducted in Accordance With Generally Accepted Auditing Standards, emphasizes that independence must be evaluated as part of the engagement acceptance and continuance process. In simple terms, before an accounting firm agrees to perform an audit, the engagement partner and the firm should ask:

• Can we remain independent from this client?
• Do we have any relationships with the client that could affect our objectivity?
• Are we providing other services that could create independence concerns?

If there are potential threats to independence, the firm must determine whether proper safeguards exist, such as the client designating a person with suitable skill, knowledge, and experience to oversee the service. These safeguards can reduce threats to an acceptable level. If independence cannot be maintained, the firm should not accept the engagement.

This evaluation is part of the firm’s client acceptance and continuance procedures, which help ensure that the firm can comply with ethical and professional requirements.

Why Confirming “Suitable Skill, Knowledge, and Experience” Matters

This requirement means the client should be able to review the work performed, understand what was done, and take responsibility for the final outcome. While the auditor can assist with financial statement preparation, the auditor cannot make management decisions for the client.

This rule exists because if the client does not have someone capable of overseeing the work, the auditor could end up acting as part of management instead of remaining independent, which could create an independence issue.

Why This Step Is Often Overlooked

In practice, this step is sometimes treated as a formality. Engagement teams may assume that if the client has a finance director or controller, the requirement is automatically met. Because of tight timelines during fieldwork, teams may focus more on completing audit procedures and less on confirming whether management is actually reviewing and understanding the work.

However, simply having a title does not always mean the person has the experience to oversee certain accounting areas. For example, a finance manager may be comfortable with bookkeeping but may not have experience with more complex areas such as grant revenue recognition or financial statement disclosures.

Case Example

Consider a situation where during a nonprofit audit, the engagement team proposed several adjusting entries related to grant revenue and subawards.

If the client’s finance director reviews the entries, asks questions, and approves the final statements, management is clearly taking responsibility for the work. But if the finance director simply accepts everything the auditor prepares without understanding the adjustments, the auditor may effectively be making the accounting decisions. In that situation, the auditor may be performing a management role, which could impair independence.

Building an Independence Mindset

SAS No. 146 reminds auditors that independence should be considered before accepting or continuing an engagement, not just during the audit itself. By evaluating relationships, services provided, and potential conflicts early in the process, firms can identify risks and apply appropriate safeguards.

In practice, many independence issues arise from everyday situations rather than complex rules. Clear communication with the client, proper documentation, and a consistent independence checklist can help accounting firms maintain compliance and protect the credibility of the audit.

Firms should emphasize independence awareness through ongoing training for staff, annual independence representations from personnel, and engagement acceptance procedures that include independence evaluations.

Final Thoughts

Maintaining auditor independence is essential to preserving the credibility and reliability of the audit process. By evaluating potential threats early, confirming management oversight, and reinforcing independence awareness across engagement teams, firms can help ensure compliance with professional standards and maintain trust in the audit process. To learn how Han Group can support your organization in navigating audit independence and nonprofit compliance. Contact Us.