Familiarity: Threat or benefit?
April 19, 2018 | Faye Hayhurst, CPA
Is familiarity a good thing or a bad thing? The correct answer is both “yes” and “no.”
As with so many things, it all depends on the situation. Developing an awareness of the benefits and risks of familiarity is critical to CPA professionals in fulfilling their ethical responsibilities.
Auditing is a field where it’s easy to see both. As a former auditor, here are a few ways I experienced it:
New audit client = lack of familiarity
Threat: So much time must be devoted to understanding the entity, business environment, management, customers and processes. Nuances and details may be missed.
Benefit: A fresh set of eyes can see things in a different way that may expose something previously undetected.
Long-time audit client = familiarity
Threat: Too comfortable with management personnel; professional skepticism and/or judgment may be impaired.
Benefit: The business is well known, expectations have been developed. The auditor’s depth of understanding facilitates adding real value.
While benefits are welcomed, threats can lead to negative -- even disastrous -- impacts. But they don’t have to. Identified threats can be addressed and steps can be taken to reduce the risk to a low level.
2018 is the year that the concept of familiarity threats becomes formally integrated into the administration of peer review. The AICPA has identified familiarity as a threat to ensuring that the peer review standards are applied consistently to all firms and reviewers. Every reviewer, and every firm being reviewed, should be evaluated the same whether they are new or very experienced, or whether they are well known by peer review committee members or not. Unfortunately, familiarity can sometimes tilt the scales, even unintentionally.
To help the program operate consistently, the AICPA has asked all peer review administering entities (AEs), including the MNCPA, to implement a process to:
Identify familiarity threats
Evaluate their significance
Apply safeguards to mitigate the threat
This three-step process demonstrates that threats need not be fatal as long as they are out in the open and dealt with honestly and earnestly. We expect a robust discussion in the MNCPA Peer Review Committee as we formalize our process for safeguarding against potential threats from familiarity.
As human beings, we value relationships. But we need to be mindful when a relationship results in a threat to a desired outcome.
Identify, evaluate, mitigate: the secret to keeping familiarity from being a bad thing.
Topics: Peer Review, Accounting & Auditing
Faye Hayhurst, CPA
Faye Hayhurst is the MNCPA director of finance and administration. She is committed to using numbers to tell relevant stories, although she also employs words, charts and occasionally clothing to communicate a message. While some have questioned her about the pressures of being the CPA for the MNCPA, Faye considers presenting financial information to fellow CPAs a dream job. Outside of storytelling with numbers, Faye enjoys directing her church's handbell choir, visiting national parks and other scenic places, and checking out the chocolate products at Trader Joe's. Faye can be reached at 952-885-5540 or firstname.lastname@example.org.
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