In The Satires written in the early 2nd century, Roman poet Decimus Iunius Iuvenalis (commonly known as Juvenal) asks the famous question: “quis custodiet Ipsos Custodes?” (“Who will guard the guardians?”). Though initially discussing the enforcement of moral behaviour, at the heart of the quote, it forces us (or should force us) to question the ethics, motives, incorruptibility, and accountability of those with authority. While the knee-jerk reaction is to apply this to government, it also has numerous applications in the business world. As we all know, one of the best ways to “guard the guardians” is through freedom of information and transparency, which is one of the main reasons why projects like the Audit Partner Disclosure Rule have been gaining traction. Still, outside of compliance and auditing circles, this term might still be a little murky and unknown, so let’s shed some light on something designed to shed some light.
Before getting into what this rule means, perhaps it’s better to examine it word by word. First, of course, is audit, which, coming from the Latin auditus, meaning ‘a hearing or listening’, is an ‘official examination of accounts’, and was initially used in this context in a record dating from 1435-36 in john Benjamin Heath’s 1869 work, Some Account of the Worshipful Company of Grocers of the City of London, where it is noted that: “A dinner made to the new masters and the Company at audit.” Coming from the Old French parçonier with a root in the Latin partitionem, meaning ‘a sharing, division or distribution’, partner, implying a joint effort in completing a task, was first used around 1330 and can be seen in Thomas Wright’s Political Songs of England from 1839, where it is written: “If the king in his land maketh a taxation, And every man is set to a certain ranson, It shall be so for pinched, to toil, and to weight , That half shall go..There be so many partners.” Literally meaning the result of (Old French –ure suffix) the opposite of (Old French des-/dis-) to close (Old French clore), our word disclosure involves the act of opening up, making known, or revealing something and originated in English via an entry around 1525 found in Mary Dormer Harris’ The Coventry Leet book, or Mayor’s Register (1908), which notes that: “For disclosure & utterance of certain seducious language.” Finally, the word rule, used as a “principle or regulation governing conduct,” comes to us from the Latin regula, meaning ‘straight stick, bar, or, figuratively, a pattern/model’, via the Anglo-Norman and Old French reule, and was first used in this manner in the Ancrene Riwle (Guide for Anchoresses) at the beginning of the 1200s, writing that: “This rule is always internal and directs the heart.”
Backtracking slightly, it’s important to understand why this rule is necessary. Audits, both internal and external, assure that compliance and records for a business are complete, accurate, prepared in accordance with the law, and correctly represent a company’s financial position. Third-party/external audits exist in order to give an independent and impartial review of a company’s records, with the logic being that internal audits, by being employed by the company and having a stake in its well-being, may have the inclination to view matters more subjectively than objectively, thus creating a bias. Moving further up the chain, while external audits can correct issues with internal audits, who can review the work of the external auditors?
This is where today’s rule is necessary. Though accounting standards really aren’t something that change or vary much (comparatively), regulations are. With regulations for everything from environmental impact to product certification to customer data protection (especially with the implementation of the EU’s GDPR), leading to more diverse auditing needs, this can mean employing the specialized auditing capabilities of several firms. Assuring transparency and accountability in external audits, the Audit Partner Disclosure Rule requires the names of assisting engaged partners as well as the name, location, and the percentage of hours attributable (for firms that reach the 5% threshold); additionally and voluntarily, the lead external audit firm may also include key data about engagement partners or other involved accounting firms.
So, to answer Juvenal’s question: with transparency, the freedom of information, and rule/filing requirements, we are watching the watchers.