Lessons · Accounting · independence in fact and in appearance
Independent in fact, and seen to be
Independence has two halves. In fact means your judgement really is unaffected. In appearance means a reasonable outsider would agree, knowing what they know. Both are required, because the value of the opinion depends entirely on strangers believing it.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
The appearance half is the one people argue with, and it is the one that protects the product. An auditor may be perfectly honest while holding shares in the client, and the opinion is still worthless to a reader who knows about the shares, because they cannot check the honesty and can check the shareholding.
How to think about it
Ask what a reasonable, informed outsider would conclude if they knew about the relationship. If the answer is that they would doubt the opinion, the independence problem is real whatever your own judgement is actually doing.
Worked example
Holding shares in the clientA financial interest. Doubted from outside whatever the truth.
A close family member in a senior finance role thereSame reasoning, no dishonesty required.
Preparing the records and then auditing themYou would be checking your own work.
Fees so large the client cannot be lostNothing improper has happened yet, and the pressure is visible from outside.
Your turn
Name the second half of independence, besides being independent in fact.
Independence must exist in fact and in
Solve one, graded on the server
The trap
Arguing that because your judgement is genuinely unaffected, the relationship does not matter. Your own certainty is the one thing an outside reader cannot verify, which is precisely why appearance is a requirement rather than a courtesy.