In the October 2017 CPA Journal (“Auditors Are Fiduciaries, but in No Way Can We Be Considered Truly Independent,”’ Letters to the Editor, p. 20), William Miller asserts that my description of a fiduciary relationship “might be true if you took the narrowest definition of the term ‘fiduciary’ that you could” and says that I “failed to acknowledge the critical role that independence plays” in my own June 2017 letter to the editor. He assumes that there is more than one definition of fiduciary, and that his definition is accurate. The use of the legal term “fiduciary” is stated in my earlier letter and defines the services provided by independent auditors. Miller’s citation of U.S. v. Arthur Young in no way modifies the definition of fiduciary. That case created no fiduciary relationship, and no subsequent case has.
An independent auditor’s obligation when auditing financial statements is twofold: to audit and then to report. That obligation grows out of a contract between the auditor and the client, and may extend to debt and equity investors who fund the audited entity. An independent auditor has no fiduciary relationship to any person or entity arising out of an audit engagement agreement. Moreover, an independent auditor has no fiduciary or contractual obligation to any other so-called stakeholder, including employees, vendors, governmental entities, or nongovernmental organizations. The authoritative auditing literature states: “The auditor’s report is normally addressed to those for whom the report is prepared. The report may be addressed to the entity whose financial statements are being audited or to those charged with governance” (AU-C 700.A19). The PCAOB auditing literature states: “The report may be addressed to the company whose financial statements are being audited or to its board of directors or stockholders” (PCAOB AU 508.09). Nothing in the PCAOB or AICPA’s literature or in the AICPA Code of Professional Conduct establishes a fiduciary relationship between an independent auditor and any party. The term “fiduciary” does not appear in authoritative auditing or ethical pronouncements to which independent auditors are subject. Consequently, independent auditors have no fiduciary responsibility to anyone. No case has held otherwise.
Miller agrees with Richard Kravitz, who states, “Our fiduciary duty—what better word is there for it?—to the public is inviolate. We must protect the company for the benefit of its stakeholder community … it is our responsibility … to protect the public interest.” These declarations characterize the independent auditors’ obligations that arise out of the audit process without defining “fiduciary,” “responsibility,” and “protect.” Thus Miller and Kravitz suggest that independent auditors effectively guarantee the GAAP fairness of audited financial statements “for the benefit of [the company’s] stakeholder community,” however those terms may be defined. Implicit in their position is the belief that a failure to provide “protection” would be harmful to all stakeholders and give them rights to sue the independent auditors. If stakeholders do not have rights to sue, the stakeholders have no effective rights.
There appears to be a misunderstanding of the rights and obligations independent auditors presently have flowing from the audit and reporting process. Those rights and obligations in the United States are governed by contract and by U.S. GAAP, U.S. GAAS; present ethical obligations issued by the AICPA, and PCAOB; and by legal interpretations of those rights and obligations. Historically, stakeholders are not beneficiaries of independent auditors’ audits and reports in the United States.
Miller also says that I “fail to acknowledge the critical role that independence plays.” The definition of independence is prominent in the authoritative literature issued by the SEC, PCAOB, AICPA and state boards of accountancy and requires no further explication. Auditors who fail to satisfy the independence requirement are subject to lawsuits brought by clients and shareholders, may have their CPA licenses revoked, and may consequently end their careers. When an auditor asserts independence, the auditor obviously recognizes the “critical role of independence.”
Miller and Kravitz may believe that applicable law, the Code of Professional Conduct, and GAAS should be amended to give all stakeholders enforceable rights to compel independent auditors to do more than audit and report. They may wish to propose changes to effectuate these results in the United States, but that does not reflect current practice.