Limassol Audit Partners: financial interests, non-assurance services and a contingent success fee

The threats are significant and cumulative. Andreas's 1% trust interest is a direct financial interest in the audit client, and his spouse's bonds are a direct financial interest of an immediate family member. Under the IESBA Code, a direct financial interest in an audit client creates a self-interest threat so significant that no safeguard can reduce it to an acceptable level; the interest must be disposed of before the engagement or the firm must resign. The eight-year partner tenure creates familiarity, and the former LAP manager as CFO adds a familiarity and possible self-review threat.

LAP also provides bookkeeping and payroll, which create self-review because the firm prepares records it later audits. Tax advisory on the Malta structure creates advocacy and self-review threats. The €50,000 success fee is a contingent fee on a non-assurance service to an audit client and is likely prohibited because it creates a self-interest threat that could influence the audit. Fee dependency is €200,000 / €1,200,000 = 16.7%, above the 15% level that requires disclosure and safeguards even for a non-PIE, and the unpaid €40,000 prior-year fee adds a self-interest threat. Continuation without fundamental changes is not supportable.

Safeguards could only work if the most serious threats are eliminated, not merely managed. Andreas and his spouse must dispose of the financial interests, or LAP must resign. The engagement partner should rotate and an independent quality control reviewer should be appointed. The fee dependency requires disclosure to those charged with governance, an external quality review and a plan to reduce reliance; the overdue €40,000 must be settled or the firm must consider whether continued association is appropriate. The former CFO should not be on the audit team and should have no influence over the audit.

Bookkeeping and payroll for an audit client cannot be safeguarded if they involve preparing the financial statements or source records that the audit then relies on; LAP should resign from one of the two roles. The tax structure must be evaluated: if it is lawful tax planning, LAP can advise only with separate teams, no management decisions and client approval; if it involves artificial transactions or false documentation, LAP must not act as advocate. The €50,000 success fee should be declined; contingent fees for non-assurance services to an audit client are not compatible with independence when they could influence audit judgements.

Andreas must respond under the NOCLAR sections of the IESBA Code. He should first escalate the matter to the appropriate level of management and, if necessary, those charged with governance, requesting that the conduct cease and that the financial statements be corrected. He must consider whether the fictitious invoices make the financial statements materially misstated, which would require a qualified or adverse audit opinion, and whether the firm can continue as auditor.

If the client does not respond appropriately, the auditor should consider reporting to the relevant authority where law or regulation permits or requires it. In Cyprus, auditors and accountants are obliged entities under the anti-money-laundering framework and must report suspicious transactions to MOKAS; tipping off the client is an offence. Confidentiality is overridden by the legal reporting obligation. Andreas should document the steps taken, seek legal advice and avoid signing an unmodified report while the unlawful scheme remains uncorrected.