A self-review threat emerges when an auditor or an audit firm is placed in a position to evaluate their own previous work, or work performed by others within the same firm, which can significantly jeopardize their objectivity and professional skepticism.
This specific type of threat to auditor independence arises because reviewing work that one has personally prepared or overseen, or work completed by close colleagues within the same organization, inherently introduces a conflict of interest. An auditor might find it challenging to critically assess and report errors, omissions, or misstatements in such work, as it could reflect poorly on their own capabilities or the firm's quality of service. This situation can compromise the integrity and reliability of the audit process.
Key Aspects of a Self-Review Threat
- Auditing One's Own Work: This is the most direct manifestation, where an individual auditor reviews financial statements, internal control systems, or other reports that they personally prepared or significantly contributed to.
- Auditing Work Performed by the Same Firm: The threat extends to scenarios where different departments or teams within the same audit firm provide distinct services to a client (e.g., accounting, tax advisory, valuation), and then another team from that same firm undertakes the independent audit of the client. In this case, the firm is effectively auditing its own output, which can impair its objectivity.
Practical Example
Consider a common scenario: an audit firm provides comprehensive accounting services to ABC Company, including the preparation of its annual financial statements. If the same audit firm is subsequently engaged to perform the independent audit of ABC Company's financial statements, a self-review threat is clearly present. The auditors would be in the position of auditing the financial statements that their own firm, or even they themselves, helped to prepare, making it challenging to maintain the necessary impartiality and professional skepticism required for an independent audit.
Impact on Auditor Independence
Auditor independence is foundational to building public trust in financial reporting. Self-review threats directly undermine this principle, leading to several critical concerns:
- Compromised Objectivity: The auditor's judgment may be influenced by their prior involvement with the work, rather than being solely based on impartial evidence and professional standards.
- Reduced Professional Skepticism: Auditors might be less inclined to question or critically evaluate the work, potentially overlooking material misstatements or weaknesses.
- Erosion of Stakeholder Trust: Financial statement users, investors, and other stakeholders may perceive a lack of independence, thereby diminishing their confidence in the audit opinion and the reliability of the financial statements.
To mitigate self-review threats, audit firms typically implement stringent policies and procedures. These often include segregating duties between different service lines, mandating independent partner reviews, or rotating audit personnel to ensure that individuals are not auditing their own previous engagements. For more information regarding auditor independence and its various threats, resources on threats to auditor independence can provide further insights.
