Can you maintain independence and objectivity in your accounting profession?
Maintaining your independence from a client, especially when auditing their accounts, is vital to having objectivity. Sometimes it is harder to distance yourself from a client, though, especially if you are invested in their well-being. In those times, it becomes more challenging to stop personal bias swaying decisions when analyzing the subject’s financial records. What do you do in this case—is it possible to remain objective without staying completely independent?
We at Gusto are proud to partner with our friends CPA Academy to bring you the webinar, “Ethics: An Independent, Objective Look at Independence and Objectivity (and Integrity).” This informative webinar took a deep look into the relationship between independence and objectivity under the guidance of the one-and-only, Greg Kyte, with special guest, Will Lopez, the head of Gusto’s accountant community.
Greg is the founder of Comedy CPE, which offers professional development with a comedic twist and has been named in Accounting Today’s “100 Most Influential People in Accounting.” His unique approach to educating people in the profession offers a fresh take on professional development in accounting.
In this article, we will examine the importance of independence in accounting, independence and objectivity in auditing, and actual vs. perceived independence.
Can you remain objective if you are not independent?
Objectivity and independence are two traits that seemingly go hand-in-hand. If you maintain your distance from your clients to stay independent, you will be more objective. However, psychological studies show that human bias steps in the way of absolute objectivity, and bias makes it even harder to remain objective the more you know about someone.
“I’m, 100%, not independent from my children, and I think I can be objective towards them. I believe that I can tell them the objective truth about things that are happening. So, in theory, yes, [you can be objective without being independent]. But because of biases, psychology says you can’t be objective. Even though you think you are being objective, you are being influenced by things from which you’re not independent.”– Greg Kyte
The reality about objectivity is that humans see the world through a lens of bias. You can do your best to have absolute objectivity, but it is simply not possible. Your ability to objectively and independently approach a situation decreases the more you interact with your client. Accepting small gifts or going out to lunch with a client may seem innocent, but these actions can sway your objectivity greatly:
“Dan Ariely is one of my favorite authors. He wrote a book called Predictably Irrational. In the book, he talked a lot about the influence that can happen [because] of small gifts. Tiny gifts are going to influence [your objectivity].”– Greg Kyte
As humans, absolute objectivity and independence are unattainable, but that does not mean you should give up on reviewing and auditing clients’ accounts. Even though you cannot maintain complete objectivity or independence, you can remain as independent as possible during your client interaction:
“I think objectivity is a spectrum, and you want to get further and further toward that objectivity. I think independence is the same thing. Independence is a spectrum. We’re never going to be 100%independent, as long as our client pays our fees, but we can strive to be more and more [independent].”– Greg Kyte
Staying as objective and independent as possible makes it easier for you to analyze your client’s financial records and make tough decisions when they are necessary. Looking at the situation as objectively as possible, maintaining your distance, and refusing to accept gifts from the client are all ways to maintain objectivity and independence.
What is the difference between independence and objectivity in auditing?
Human nature prevents people from being truly independent, but auditing companies do their best to maintain their independence from clients by setting ground rules for client interaction. Some examples include using an audit committee for hiring and firing to create a degree of separation between the clients and the auditor themselves or setting a limit on how much interaction auditors can have with clients.
Even when companies do their best to maintain independence, objectivity can suffer. A prime example of this is the way the IRS conducts audits. The IRS is independent of the taxpayers they audit. Still, because it is the agent’s job to find something wrong with the taxpayer’s records, they can’t remain purely objective:
“The IRS is independent, but they’re not necessarily objective. … They don’t represent you at all. As a matter of fact, they’re adversarial. … If you go out to audit a taxpayer and come back to your home office and they ask, ‘How’s that taxpayer’s [records] looking?’, and you respond with, ‘Squeaky clean. I found nothing.’ [Your] office is going to tell you that you’re not doing your job and send you back to find something. Even if it’s little, you have to find something.”– Greg Kyte
In this example, the bias behind IRS audits is the amount of money riding on finding something wrong. The auditing process is what justifies the expense and payroll of the agents who work for the IRS. If they do not find anything wrong with taxpayer accounts, their value will decrease. As a result, the motivation of generating enough revenue to maintain their jobs heavily influences the way agents approach performing tax audits.
The most important thing to remember when performing audits is that, even though you cannot remain completely independent and objective, you can do your best to stay close to independence and objectivity. When you stay focused on those traits, you will be able to maintain a high level of auditor independence and influence people’s perception of your objectivity in a positive way.
What is the difference between actual and perceived independence?
Everyone knows that your view of how you interact with the world and the way others view you is potentially different. Many factors influence people’s decisions about you, including—your circle of friends, where you live, and where you work. These assumptions apply to both the personal and professional interpretations of you.
It is difficult for people to view you as objective if they do not see you as independent. You can conduct yourself in a way that follows every guideline in the AICPA Code of Conduct. However, people will not believe you are independent and objective unless they see proof of it:
“The whole [idea] about the appearance of independence or the appearance of objectivity based on independence is a huge thing. I remember when I first encountered the phrase, ‘We need to be independent, in fact and appearance.’ The appearance part really bugged me because who cares if I look independent if I really am independent. … But it actually is very important, especially with what we do. We [need] to maintain the appearance of independence.”– Greg Kyte
Though you may not want to believe it, maintaining perceived independence is as crucial to accounting and audit as actual independence. It is impossible to remain completely independent most of the time because your clients pay you. However, you can create the appearance of independence despite being paid by your client. An appearance of independence influences clients to see you as more objective while reviewing their financial records.
Learn more about independence and objectivity in accounting
It may be humanly impossible to retain absolute independence and objectivity in accounting, but that does not mean you should stop striving for it. The more you focus on ethically conducting your business, the more people will perceive you as such. A great way to stick to ethical behavior in accounting is to follow the AICPA Code of Conduct and apply yourself to working through your personal biases.
“We can’t be absolutely independent, but independence is aspirational. It’s a spectrum, and we should be trying to get more and more independent. Objectivity is the same way. We can’t be 100 percent objective, but it is aspirational as well. … We need to strive to be more objective overall. … If we’re following the AICPA Code and doing all of those things right, even if we’re not truly independent, we are going to be adopting more of the appearance of independence.”– Greg Kyte
If you want to learn more about maintaining ethical behavior surrounding objectivity and independence, check out the entire webinar here. Also, if you want to know more about the relationship between objectivity and integrity and how to navigate difficult questions in the workplace, be sure to check out Part One and Part Two of this webinar article series!
Our mission at Gusto is to create a world where accountants can work with integrity and provide honest, professional opinions. Be sure to look into our People Advisory Program to learn how you can train your team to reach their potential. We also provide a partner blog full of resources for all your advising needs. Visit our Gusto for Accountants page for more information on utilizing people-based accounting within your firm.