CPA firms are required by professional standards to maintain independence regarding their clients. The reasons for this are not hard to understand. No one would be able to rely on an audit report if, for example, the CPA performing the audit was the son of the auditee’s chief executive officer.
Auditors and audit organizations (CPA firms) must maintain independence so that their opinions, conclusions, judgments and recommendations will not only be impartial, but will be viewed as impartial by reasonable and informed third parties.
A threat to a CPA's independence comes from one of two areas:
Ø A situation that could affect the auditor's ability to conduct the engagement without being affected by influences that compromise professional judgment (independence in fact)
Ø A situation that could expose the auditor to circumstances that would cause a reasonable and informed third party to conclude that the integrity, objectivity, or professional skepticism of the auditor, or the organization the auditor works for, has been compromised (independence in appearance).
A CPA firm must make an assessment, before accepting each audit engagement, to determine whether any relationships or other conditions exist that may be an impairment or threat to their firm’s independence.
If the CPA firm determines that threats exist, the firm must then determine whether these threats can be overcome by putting appropriate safeguards in place to reduce the threats to a level that would allow them to maintain their independence. Examples of safeguards may include removing a staff member with an independence threat from the audit engagement, or having another CPA firm review the audit work performed.
If the threats to a firm’s independence cannot be overcome by appropriate safeguards, the CPA firm cannot accept the engagement. If the threat is identified after the engagement has commenced, the CPA firm must withdraw from the engagement.
A CPA firm cannot enter into an engagement with a pre-conceived notion that the
local auditee 
is doing everything right; or that they will issue a clean or unmodified opinion and write no findings no matter what they discover. It also means that the CPA cannot enter into the engagement with a pre-conceived notion that the local auditee is doing everything wrong. Going into an engagement with either attitude impairs the independence of the CPA firm.
The CPA firm that performs a local auditee’s audit will not be able to perform certain non-audit services for the local auditee. The CPA firm may make recommendations to the local auditee, but may not implement the recommendations for the local auditee. The CPA firm may propose adjustments to a local auditee’s financial statements, but may not post the adjustments into the local auditee’s books and records without the approval of the local auditee's management. The CPA firm may not make decisions that should be made by the local auditee’s management, and still remain independent to perform the audit.
The Louisiana Legislative Auditor (LLA) will not approve an audit or review/attestation engagement of a CPA firm if LLA has valid reason to believe that the CPA firm is not independent regarding the local auditee. A CPA firm is not required to be independent to perform a compilation engagement.
QUESTIONS:
Q. The auditor of our city is the cousin of the public works director. Wouldn’t that mean that he lacks independence regarding the city and cannot perform the audit?
A. The familial relationship you are describing, in and of itself, would not automatically compromise the CPA firm’s independence regarding the city. However, the CPA would need to take the relationship, along with any other relevant circumstance (for instance, if the two are close friends or live in the same house) into consideration in order to determine if there is a threat to his or her independence before accepting the engagement. If a threat exists that cannot be overcome by appropriate safeguards, the CPA firm cannot accept the engagement.
Q. To whom should I direct my complaint if I believe that a local auditee’s CPA firm has an independence impairment?
A. You can
call LLA’s Director of Local Government Services .
Q. There is a finding in our school board’s audit report stating that the financial statements are prepared by the CPA firm that performs the audit. I thought the financial statements were the responsibility of the school board. Wouldn’t that mean that the CPA firm that performs the audit could not also prepare the school board’s financial statements?
A. Preparing a local auditee’s financial statements is among the non-audit services the CPA firm that is performing the audit may also do if there is a person within the local auditee organization who possesses suitable skill, knowledge, or expertise to oversee the work of the CPA. This person is not required to be able to prepare the financial statements, but must be able to accept responsibility for them.
Although it is a common and accepted practice for the CPA firm that performs a local auditee’s audit to also prepare its financial statements, the inability of a local auditee to prepare its own financial statements is considered to be a deficiency in the local auditee’s internal control over financial reporting. If the CPA firm determines that this deficiency is significant or material to the local auditee’s internal control over financial reporting, he or she is required by
generally accepted auditing standards to write a finding related to this condition.
Q. How can a CPA firm be independent if the local auditee pays them to perform their audit?
A. Abiding by independence and ethical standards, while accepting payment for their services, is a concept that is not limited to the CPA profession. CPA’s are required to abide by the independence and ethics codes of the American Institute of Certified Public Accountants (AICPA) and the Government Accountability Office (GAO) if they expect to continue to practice.
Q. LLA is a state agency. How can it audit state agencies and maintain its independence?
A. LLA is careful to follow the independence requirements for audit organizations (like LLA) that are structurally located within government entities, found in Sections 3.52 - 3.55 of
Government Auditing Standards issued by the Government Accountability Office (GAO). For example, LLA does not audit other Louisiana legislative branch agencies; those audits are performed by approved CPA firms.
Q. Will LLA staff make a ruling on the independence of a CPA firm?
A. LLA staff may offer an opinion on a CPA firm’s independence, but the CPA must make the ultimate determination of his or her independence, in accordance with Chapter 3 of
Government Auditing Standards. For definitive answers, LLA will refer the person to the GAO or the AICPA.