Statistics reveal that in 2023, local finance departments (bureaus) imposed administrative penalties on 197 accounting firms and 509 certified public accountants (CPAs), representing year-on-year increases of 13.22% and 21.77%, respectively. The lack of independence or insufficient maintenance of independence by CPAs is one of the main reasons for audit failures.

To ensure audit independence, in addition to strengthening the professional ethics of CPAs, it is also crucial to optimize top-level design, implement refined and integrated management, and enhance independence.

Recently, the Chinese Institute of Certified Public Accountants (CICPA) has publicly solicited opinions on the "Chinese CPA Independence Standards No. 1 - Requirements for Independence in Financial Statement Audits and Reviews (Draft for Comments)", intending to issue it as an administrative regulatory document to enhance the authority and enforceability of independence requirements.

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Statistics show that in 2023, local finance departments (bureaus) imposed administrative penalties on 197 accounting firms and 509 CPAs, with year-on-year increases of 13.22% and 21.77%, respectively. The lack of independence or insufficient maintenance of independence by CPAs is one of the main reasons for audit failures. "Independence is an objective requirement for the practice of CPAs, an essential condition to ensure that CPAs can make objective and fair audit conclusions, and also a shield for CPAs to stand above clients and ensure that audits have 'independent personality'," said Cui Zhijuan, a professor at the Beijing National Accounting Institute and director of the Digital Auditing and Risk Management Research Center. She believes that the establishment of independence standards has a milestone significance for maintaining the reputation of the audit market, cultivating high-quality accounting firms, and improving the professional ability and level of CPAs.

The Standards clarify the scope of public interest entities and strengthen related regulations. For example, they specify that when performing financial statement audit services for audit clients that are public interest entities, accounting firms need to follow higher independence requirements and should publicly disclose this fact. At the same time, they clarify the scope of entities that should be considered public interest entities and further provide guidance on the factors to consider when assessing the impact of an entity on the public interest. According to the Standards, entities that should be considered public interest entities by accounting firms include but are not limited to: publicly traded entities; entities whose main function is to absorb public deposits; entities whose main function is to provide insurance to the public; pension funds; collective investment vehicles, such as securities, funds, and futures-related products; private entities with a large number of stakeholders (excluding investors); non-profit organizations or government agencies; public utilities; non-listed financial institutions, except for non-listed institutions whose funds do not come from the public and do not have a large number of stakeholders; entities that should be considered public interest entities according to the provisions of laws and regulations.

In terms of fee-related regulations, it is clarified that accounting firms should not allow their provision of other services besides auditing to audit clients to affect audit fees, and requirements have been strengthened to address the issue of excessive reliance on fees from individual audit clients. In addition, for audit clients that are public interest entities, accounting firms are required to communicate with the client's governance layer and publicly disclose fee-related information.

In the area of non-assurance services, it is clarified that accounting firms should not provide non-assurance services to audit clients that are public interest entities that may adversely affect independence due to self-evaluation. At the same time, it is clarified that providing non-assurance services to audit clients that are public interest entities requires communication with the client's governance layer and obtaining their permission. The Standards also strengthen the provisions for assessing whether non-assurance services adversely affect independence and the severity of such effects, and impose stricter requirements for providing certain non-assurance services.

Industry insiders say that the Standards are conducive to further promoting the healthy and long-term development of the industry. "The new rules will encourage accounting firms to pay more attention to internal quality management," Cui Zhijuan analyzed. She believes that audit independence depends on the quality management of accounting firms, and the implementation of independence standards requires accounting firms to achieve audit independence by establishing systems and procedures, which requires accounting firms to strengthen the construction of quality management systems. For CPAs, audit independence provides them with greater space to use audit professional knowledge to provide services, and CPAs can increase client resources through the improvement of audit report quality. Ultimately, the appointment of high-quality CPAs will become a channel for listed companies to send signals to the market.

"The dependence of CPAs on client resources affects audit independence, increases new ways of financial fraud, and damages the reputation of the audit industry. Audit independence will inevitably allow the audit industry to re-establish the image of a guardian of the capital market, maintain and enhance the market position of the audit industry through the quality of audit reports, and promote the improvement of the reputation of the audit industry," said Cui Zhijuan. Experts believe that to ensure audit independence, in addition to strengthening the professional ethics construction of CPAs, it is necessary to optimize top-level design, implement refined and integrated management, and enhance independence.