For major energy and infrastructure transactions, the financing documents often require the model auditor to be an accountancy firm of sufficient standing. When it matters most, the parties to a deal choose an accounting firm to audit the model.
Why is model audit the domain of accounting firms? Several factors contribute, and the most important is their strict adherence to ethical principles. Those principles are the foundation of trust in a professional model audit.
Ethical principles
Forvis Mazars is regulated by the Institute of Chartered Accountants in England and Wales (ICAEW). The ICAEW Code of Ethics sets out the fundamental principles that guide us to deliver our services with integrity, objectivity and professionalism. In summary:
- Integrity: we must be straightforward and honest in all professional relationships, so clients and stakeholders can rely on our findings.
- Objectivity: we must not let bias, conflicts of interest or undue influence override professional judgement.
- Professional competence and due care: we must keep our professional knowledge and skill up to date and act diligently, applying technical and professional standards.
- Confidentiality: we must respect the confidentiality of information gained in professional relationships and not disclose it without proper authority, unless there is a legal or professional duty to do so.
- Professional behaviour: we must comply with relevant laws and regulations and avoid any action that discredits the profession.
Professional scepticism
Underpinning this ethical approach, the ICAEW highlights professional scepticism: an attitude that includes a questioning mind and alertness to conditions that may point to a misstatement through fraud or error.
Why ethics and scepticism matter in model audit
Ethical standards and professional scepticism have far-reaching consequences. Two are particularly relevant in today’s model audit market.
- Independence. Ethical standards require us to stay independent in mind and in appearance. Independence is what makes an assessment of a model unbiased. If model auditors become too involved in building the model, their objectivity may be compromised. Clear boundaries keep the opinion impartial.
- Reliability and trust. Many stakeholders rely on a model audit opinion to make decisions. Professional scepticism makes sure models are thoroughly reviewed, which reduces the risk of errors or intentional misstatements.
The risks of over-collaboration
Some approaches to model audit offer close collaboration between the model auditor and the model builder. Collaboration helps in many settings, but in model audit it brings real risks:
- Blurred responsibility: too much collaboration can shift responsibility for the model’s accuracy from the builder to the model auditor.
- Weaker objectivity: a model auditor who helps change the model can no longer assess it independently.
- Data security: collaboration platforms need careful management, and live model audits in the cloud from unidentified locations raise questions about data security.
- Ethical dilemmas: close work with one party, such as the model builder or equity sponsor, can create pressure to overlook issues or adjust findings. That conflicts with the needs of other stakeholders, such as banks or government procurers, who rely on the model auditor’s independent opinion.
Best practice for professional model auditors
- Keep clear boundaries. Define the roles of the model builder and the model auditor. The model audit team assesses and verifies the model and takes no part in building it.
- Follow a professional ethical code, such as the standards set by the ICAEW.
- Communicate clearly. While staying independent, report findings clearly and constructively, through agreed and secure channels.
- Keep training. Model auditors need ongoing professional development in ethical standards and in exercising professional scepticism.
Takeaways
Ethical standards, applied with professional scepticism, keep a model audit independent, thorough and reliable. Collaboration has its place in business, but the integrity of a model audit depends on clear boundaries and a firm commitment to ethical principles.