| The AC does not comprise former partners or directors of the company's existing auditing firm or auditing corporation: (a) within a period of two years commencing on the date of their ceasing to be a partner of the auditing firm or director of the auditing corporation; and in any case, (b) for as long as they have any financial interest in the auditing firm or auditing corporation. |
A. Explanation
This Provision sets out the restrictions on former audit partners from functioning as AC members.
Because the AC plays a critical role in ensuring the integrity of the financial statements through its oversight of the company’s financial reporting process, internal control system and audit function, it is important that its members are independent in both mind and appearance.
Where a former partner of the company’s external auditor becomes a director of the company, he may face the following potential conflicts of interest:
- A threat of self-review, where the director reviews the scope and results of a previous external audit that he performed in his capacity as the external auditor. This scenario potentially impairs his judgment and ability to perform an objective review.
- A threat of self-interest, where the director with a vested interest may benefit by influencing the re-appointment, remuneration and terms of engagement of the external auditors.
- A threat of familiarity, where the director with a long or close relationship with the external auditor may be too sympathetic to the interests, or too uncritically accepting, of the work of the audit firm.
Any of the above may affect the director’s actual and perceived objectivity in the exercise of his judgement and thus impair his duty to act in the company’s best interest. As such, the Provision states that as long as the former partner of the external auditor still has a financial interest in his former firm, or only left less than two years ago, he should not be appointed a member of the AC.
This two-year cooling-off period is consistent with the Code of Professional Conduct and Ethics for Professional Accountants and Accounting Entities, where an audit engagement team member or key audit partner may not continue on an audit of a public interest entity after seven years for at least two years.
B. Practice Guidance
C. Related Rules and Regulations
- Nil.
D. CG Guides
- AC Guide 1.4: Independence and Objectivity [AC Composition].
- AC Guide Case Study 1B-2: Former EA Partner as an AC Member [AC Composition].
E. Related Articles
- Nil.