Everything You Need to Know About Auditor Independence
For cloud service organizations that collect and store high-value data from their customers and stakeholders, obtaining a System and Organization Controls (SOC) report is an effective way to demonstrate that you take security and privacy seriously.
In the U.S., all SOC engagements are performed by independent CPA firms operating under guidelines set by the American Institute of Certified Public Accountants (AICPA). But what does it mean for an auditing firm to be “independent,” why is that so important, and what does it look like in practice?
In this article, we’ll explore the nuances of auditor independence, especially as they relate to SOC audits, and discuss the role auditor independence plays in helping an organization maintain the highest levels of assurance.
Let’s dive in.
What is Auditor Independence?
Independence is one of the chief cornerstones of professional auditing. In order to provide a fair and objective opinion on matters like finance or cybersecurity, both internal and external auditors must maintain a degree of separation between themselves and the organizations they serve.
For internal auditors—or those who are employed by the organization they’re auditing—this means staying an arm’s length away from system management. After all, you can’t audit your own work. In order to maintain independence, internal auditors must be removed from the day-to-day operations so they can get a bird’s eye view of the organization’s processes and procedures and objectively evaluate their effectiveness.
External auditors are subject to even more stringent rules. For an auditor or auditing firm to be truly independent, they must be able to provide an unbiased opinion, free from any potential conflicts of interest. If an external auditor stands to benefit personally, professionally, or financially from the results of an audit, there may be a conflict of interest at play that could impact the validity of their final report.
Auditor Independence and SOC Engagements
Auditors and auditing firms performing SOC engagements must adhere to standards outlined by the AICPA in its Code of Professional Conduct. In its Plain English Guide to Independence, the AICPA defines auditor independence as an ability to “act with integrity and exercise objectivity and professional skepticism.”
According to the AICPA, independent auditors are able to perform attest services “without being affected by influences that compromise professional judgment.” If there are factors that pose a threat to an auditor’s independence, the auditor may need to document the safeguards they have put in place to ensure their professional judgment is not compromised—or they may not be able to perform the engagement at all.
Examples of influencing factors that could compromise an auditor’s professional judgment and prevent them from offering an objective opinion include:
Financial interest in the organization—for instance, if the auditor or one of their immediate family members has made a substantial investment in the business;
Personal relationships with the organization’s leaders, or other team members who are involved in the organization’s accounting or financial reporting; and,
Pressure from executives to provide a certain opinion—for example, if an auditor feels compelled to issue a clean report for fear of losing the client.
The AICPA also notes that auditors are required to be independent “both in fact (that is, of mind) and in appearance.” Auditors should take active steps to avoid the perception that the integrity of their work could be compromised.
In practice, this means auditors—and their immediate family members—should not:
Accept any significant gift from a client;
Enter into a business relationship with a client, including as a contractor or subcontractor;
Acquire an individual insurance policy or product from a client; or,
Invest money in or borrow money from a client, except in specific circumstances.
This isn’t meant to be a comprehensive list. The bottom line is that auditors should steer clear of any actions that might raise questions about the integrity of their conclusions.
To mitigate this risk, auditing firms that perform SOC engagements are required by the AICPA to undergo regular peer reviews to confirm they are operating independently and in accordance with the latest standards.
Firms might also be subject to other compliance requirements in order to maintain licensure to perform other audits. Governing bodies including ISO/IEC, the Securities and Exchange Commission (SEC), and the Public Company Accounting Oversight Board (PCOAB) have each outlined basic standards for determining auditor independence.
In all cases, auditors aiming to preserve their independence must understand the limited role they play for the organization as well as what is in scope for the engagement at hand. For example, SOC 2 auditors are able to offer guidance based on industry standards and best practices, but they cannot also be responsible for making those changes. So while your auditor can’t help you design or implement new controls, they can provide recommendations to help your organization improve its security posture.
Why is Auditor Independence So Important?
Undergoing an independent, third-party audit is a crucial step for organizations aiming to mature their security and compliance programs. For some businesses, it may even be a requirement in order to comply with industry or regulatory standards.
By working with an independent security auditor, you not only check off the box on certain compliance requirements, but you can also feel confident that you’re getting an objective look at your organization’s overall security posture. An independent auditor can offer high-quality, personalized advice that you and your team can take immediate action on to better protect customers and stakeholders.
Working with an independent auditor also helps you build credibility by ensuring the integrity and accuracy of the audit. This builds trust with current and potential customers and other stakeholders and helps keep them better protected from things like fraud and data breaches.
In short, if you want a fair and accurate assessment of your organization, enlisting the help of an independent auditor is critical.
What Does This Mean for Me?
The good news is that as a cloud service organization, you are not responsible for keeping up with standards and requirements for auditor independence. That burden falls squarely on the shoulders of your auditing firm, which will establish rules to ensure members of their team remain impartial throughout your engagement.
Those rules don’t just apply to the auditors themselves: Close family members—including immediate family, parents, non-dependent children, and siblings—can also affect an auditor’s independence. For instance, if any of these individuals are employed by the organization in an accounting or financial reporting role, it could impair the auditor’s ability to serve as an impartial observer.
Auditors are also subject to rules limiting their scope of practice. For example, your auditor cannot serve your organization in a consulting capacity. In order to remain truly objective, your auditor must be removed from the design, implementation, and maintenance of your systems. They can offer advice, but putting those words into action falls outside of the scope of the engagement.
In that same vein, your auditor also cannot decide which compliance framework fits best for your business. Their task is to look objectively at the requirements to achieve compliance and determine whether your organization has established processes and procedures in accordance with the standard. If not, they can offer suggestions for how to remediate those issues, but it’s up to your team to follow through.
This doesn’t mean your auditor can’t serve as a trusted partner to you and your team, however. While external auditors can’t consult on or assist with the development and implementation of security procedures, they can:
Share their perspective on industry best practices to help improve processes and functionalities;
Help educate their clients about new threats and compliance requirements; and,
Offer feedback on potential gaps and areas for improvement.
External auditors can also work closely with internal auditors to maximize efficiency. If your organization has a strong, independent internal auditing team, they can serve as a liaison between the business and the external auditing firm, helping to ensure external auditors have a clear picture of the organization's control environment and risk management procedures. This makes for a smoother engagement and a more streamlined journey to compliance against standards like SOC 2 and ISO 27001.
Choosing the Right Auditing Firm
Working with an independent auditing firm on a cybersecurity compliance engagement offers a number of benefits to your organization, including:
Assuring the accuracy of the audit;
Ensuring adherence to regulatory requirements;
Boosting your credibility among customers and stakeholders; and,
Helping your organization continuously improve its security posture.
But independence is only one piece of the puzzle. Before settling on an auditing firm, security leaders should work to identify firms that fit their organization’s size, goals, and values.
In making your assessment, consider questions such as:
What are our biggest cybersecurity and compliance challenges?
What goals have we set for our security and compliance program?
How do we plan to use our SOC report or other compliance attestation?
What other cybersecurity frameworks might be want to pursue compliance against in the future?
Will we be working with the same engagement team year after year?
How does the company culture at this auditing firm compare to our own?
What is this firm’s reputation in the industry and among my own professional network?
You might choose to solicit references from potential auditing firms before making a final decision.
Key Takeaways
In sum, independence is one of the core tenets of a successful, valuable cybersecurity audit. Governing bodies like the AICPA have established rules for auditing firms to maintain objectivity and impartiality as they assess a service organization’s security controls and procedures—and for good reason. Only truly independent auditors are able to provide fair and honest assessments of an organization’s security posture.
Current and potential customers rely on the credibility of SOC reports and other compliance attestations to make informed decisions on purchases and vendor risk management. By maintaining their independence, auditors uphold the integrity of the audit process, providing organizational leaders, customers, and stakeholders with confidence in the reliability of their findings—and setting the organization up for long-term success and cyber resilience.
Ready to take the next step toward achieving compliance? Audora uses automation to simplify the attestation process for both auditors and auditees. Book a demo today to learn more.
