Dr. RuedigerLoitz (CPA), PwC Germany capital markets & accounting advisory services partner, analysis how independence rules for auditors with respect to the development, estab-lishment and implementation of financial reporting systems affect accounting tools.

Triggered by the development around IFRS acceptance in the world, mandatory in the EU since 2005, the on-going change of the IFRS has reached a significant level of complexity. In course of the move to IFRS, companies have already adapted their accounting systems based on the results of wide-range projects in order to fulfil the new requirements. But, most stan-dardised systems are still not able to reduce the complexity resulting from the numerous accounting standards (e.g. leasing, deferred taxes, pensions) and tax laws. Consequently, companies implement IT-applications in addition to their bookkeeping system, in order to simplify and automate the calculation and data collection. In fact, companies can often only withstand the pressure for timely financial statement information because this electronic support enables a "fast close".

Why is it relevant for the audit profession?
When classifying the services that an auditor can offer regarding accounting tools, it has to be considered that the legislator as well as the standard-setter continuously increases the requirements for users of national and international accounting standards. The use of ac-counting tools in addition to existing standard ERP (Enterprise Resource Planning) and con-solidation systems becomes indispensable. Accounting firms are most suitable for the devel-opment of such systems. They are able to provide the special accounting know-how and they can link it with the necessary IT- and process components. Nevertheless, this "ideal so-lution" counteracts the existing independency regulations for auditors which do not easily allow accounting firms to offer services in this area.

If an accounting firm develops and implements software related to the preparation of finan-cial statements which is audited by the accounting firm afterwards, a logical conclusion is that the auditor audits processes he has created himself through the implementation of the accounting tool. In this case the accounting tool would be a direct audit object, since it is part of the audit and therefore subject of the audit. The same applies for every other form of development which, in fact, corresponds to the development of such systems, e.g. Excel templates that the respective company uploads to a SAP-/web-basis. On a certain level of abstraction the IESBA Code of Ethics represents the international independence require-ments for auditors. Nevertheless, they do not replace the national regulations. The IESBA regulations can rather be seen as general guidelines, as of how especially international oper-ating accounting firms should ensure consistent independence standards within their own network when supporting global operating companies. International operating accounting firms comply voluntarily with the IESBA Code of Ethics in order to ensure their compliance for international purpose.

Despite the fact that an auditor cannot develop accounting tools, could he implement the system from a software vendor?
Generally, an auditor is allowed to assist in the implementation for an audit client consider-ing the following aspects in a typical implementation project:

Project Phases Allowed for audit firm
Phase 1

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Project plan, start of the project

  • Auditor is not allowed to be part of the steering committee / project leader for the implementation
  • Client has to be responsible for the project management during all phases of the implementation
Phase 2

Technical concept for the tool must be de-fined and written down

  • Auditor can discuss technical aspects of IRFS or other standards with client
  • Decision about turning requirements of accounting standard into the soft-ware must be done by client
Phase 3

IT Concept for the tool must be defined and written down

  • Auditor can perform a review of the concept and give advice
Phase 4

Testing the tool with client data

  • Auditor is not allowed to test the tool for the client
  • Auditor is allowed to test with gen-eral, fictious examples (eg. expam-ples from the accounting standard it-self)
Phase 5


  • Auditor can perform general train-ings about IFRS
  • Auditor training with respect to cer-tain examples of the client is not al-lowed
Phase 6


  • Auditor reviews the tool and the con-tent / analysis of content
  • Auditor is not allowed to fill out the tool

All in all, the principals for audit-related advisory allow accounting firms to support the es-tablishment and implementation of AIS/FRS within certain parameters.

Can an international auditing firm really make a difference between an audit client and an non-audit client?
So far the analysis has given little attention to the fact that audit clients may change. More-over, accounting tools may change and new versions of accounting tools may have to be im-plemented. Additionally, rotation rules lead to regular changes of the auditor. The following example shall discuss both aspects "change of accounting tool" and "change of audit client" with regard to the described independence problem.

For a moment we assume that an accounting tool is implemented in year 01 by an audit firm. The audit firm is not the auditor in 01. In year 02 the audit firm is engaged as auditor by the company. Critical in this case is that previous year’s figures as well as systems/processes of year 01 are audited by the firm that has implemented the accounting tool. Therefore, the first audit should be at least one year after the implementation of the accounting tool (cool-ing off). Hence, the accounting firm should either refrain from the audit in year 02 or the ac-counting tool of the accounting firm must be replaced for another accounting tool which was not developed by the respective accounting firm. Starting from year 02, the audit firm can-not be involved in the implementation of a self-developed accounting tool as auditor of the company anymore. Finally, the analysis leads to the point that audit clients and non-audit clients regarding the development, change and marketing of an accounting tool have to be treated equally.

How can a joint business relation to a software vendor be avoided?
The main goal is to point out what an audit firm has to consider when cooperating with a software firm regarding accounting tools. The independence regulations include a so called "Joint Business Relationship" (JBR). A JBR between an audit firm and another company en-tails that the services of the other firm are attributed to the accounting firm. If the services are attributed to the accounting area, they have to be regarded as if the accounting firm had rendered them themselves.
That means, both companies have to be separated by corporate and civil law. Both compa-nies need to have an own corporate identity. Despite these restrictions, audit firm may work together with a software firm. In doing so, especially the exclusive character of respective services must be excluded.

The increasing complexities of accounting as well as the need to prepare financial state-ments in accordance with different standards in time under fast close conditions lead to the fact that common used accounting programs are not able to fulfil the given requirements. Using tailor-made accounting tools represents a common solution, since they enable com-panies to meet the requirements of complex accounting standards. International audit firms are able to deliver the services as they are deeply involved in the development of the ac-counting standards but they have to consider very carefully the above mentioned rules and restrictions.