Auditor independence and non-audit services - ICAEW

firms have, over the last 10 years, transformed themselves from audit firms into multidisciplinaryprofessional service organisations and the issue of auditor independence hasstrongly re-emerged as a concern (Kornish and Levine, 2000). Jeppesen (1998) furtherargues that changing audit methodologies in the larger firms are blurring the boundariesbetween auditing and consulting and undermining the independence of the audit processitself.It is also interesting that an Independent Oversight Board (IOB) set up by Andersen in theUS, after the Enron problems emerged but before the firm collapsed, recommended thatsome consulting services provided by the firm should be separated into partnershipsmanaged independently from audit partners and without financial interdependence(Andersen, 2002). Some services remaining in the audit practice should not be providedto audit clients. 1 However, the main thrust of the IOB’s recommendations was astrengthening of internal quality control over auditing throughout the firm.1.3 The current UK regulatory and professional environmentAudit firms have defended themselves robustly against criticism that NAS underminesindependence, insisting that integrity is crucially important to their existence.Representatives of the UK profession have also warned against over-reacting byassuming those problems arising in the US will automatically occur in the UK, where theregulatory framework is different. At the same time there is a recognition of the need toreview and make changes to the UK framework where it is deemed necessary (Wyman,2002). The Chairman of the UK Financial Services Authority (FSA) stated that the FSAintended to consult on the current UK provisions in relation to NAS (Davies, 2002).There are also indications that, post Enron, company boards are willing to pay higheraudit fees for higher levels of assurance, but at the same time some boards are buyingfewer NAS from their auditors (Parker, 2002).The regulatory framework in the UK in respect of NAS is two-pronged. First, listed andother large companies have, since 1992, 2 been required to disclose in their annual reportthe amount of NAS fees paid to their incumbent auditor. Second, the auditorindependence framework, to which all UK registered auditors must adhere, providesguidance as to which NAS an audit firm can provide, with appropriate safeguards,without compromising independence. The services for which adequate safeguards cannotbe put in place are not allowed. The EC’s recent Recommendation on Statutory Auditors’Independence (EC, 2002) suggests that NAS disclosure should be further broken downinto assurance, tax advisory and other, with details being provided as to the compositionof ‘other’. The Recommendation also restricts the range of NAS that an audit firm should1 The services which the IOB recommended should not be provided by the audit practice were: substantialinformation and communication technology (ICT); strategic planning; the practice of law; executiverecruitment; and certain areas of ‘aggressive’ tax planning and advocacy unrelated to audit. The serviceswhich should remain in the audit practice but not be provided to audit clients are: outsourced internal audit;executive taxation; and limited ICT design for smaller clients. Services which should continue to beprovided to audit clients are: tax preparation and compliance; due diligence; and valuation of assets andauditing of employee benefits as permitted by regulation.2 It is interesting that disclosure of non-audit services fees in the US (apart from a earlier brief period) wasnot required until the SEC revised its independence rules in 2000 (SEC, 2000).2