Auditor independence and non-audit services - ICAEW

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Table 3.2: Recommended treatment of NAS in regulatory frameworksTypes of non-audit servicereferred to in frameworksRegulatory frameworkIFAC ICAEW EC Australia SECExercise managementNo No No No NoauthorityDetermine clientimplementation of auditor’sNo No specificguidanceNo specificguidanceNo No specificguidanceown recommendationsReport in a management roleto client governance bodyNo No specificguidanceNo specificguidanceNo No specificguidanceCustody of client assets NormallyNoNo specificguidanceNo specificguidanceNormallyNoNo specificguidanceSupervise client employees innormal activityNormallyNoNo specificguidanceNo specificguidanceNormallyNoNo specificguidancePrepare accounting recordsand financial statements forNormallyNoNormallyNoNormallyNoNormallyNoNormallyNopublic interest entitiesValuation services and otherexpert servicesNo ifmaterialCaution No ifmaterialNo ifmaterialNormallyNoTaxation services Yes Caution No specificguidanceYes No specificguidanceInternal audit services Caution No specificguidanceCaution Caution NormallyNoIT services & financialinformation technologyCaution Caution NormallyNoCaution NormallyNosystemsTemporary staff assignments Caution No specificguidanceNo specificguidanceCaution No specificguidanceLitigation support services Caution Caution No ifmaterialCaution No specificguidanceLegal servicesNormally No specific No specific Normally NoNo guidance guidance NoRecruiting seniorCaution Caution No Caution Nomanagement & HRCorporate finance and similar Caution Caution No specificguidanceCaution No specificguidanceActuarial servicesNo specific No specific No specific No specific NormallyBroker/dealer servicesguidanceNo specificguidanceguidanceNo specificguidanceguidanceNo specificguidanceguidanceNo specificguidanceNoNoKey:nonormally nono if materialcautionyesno specificguidance=prohibited;=prohibited except in very limited or exceptional circumstances;=only permitted if the figures involved are not material to the financialstatements;=threats and safeguards of each case should be considered beforeproceeding;=permitted;=not referred to as NAS in the framework, therefore no specific guidanceprovided21
There is a significant self-review threat in both these areas. SEC also prohibitsactuarial services and broker/dealer services, which are not specifically identified inother frameworks, although they could be deemed to be covered by the guidanceunder ‘valuation and other expert services’ and ‘corporate finance and similar’. Theinconsistencies between the frameworks merit further review, particularly thedifference in the views of the restrictions on internal audit and the installation offinancial information technology systems.The absolute prohibitions are for activities which clearly demonstrate exercisingmanagement authority and overtly auditing one’s own work. However, where thematter is not clear in respect of these and other threats, the auditors are required toconsider the extent to which the specific service, in the context of the wholerelationship with the client, is a risk to independence and whether the safeguardsavailable are adequate to mitigate the risk. Whether the independence risk is actual orperceived is not explained. However, what is obvious from these frameworks, exceptfor SEC, is that judgments need to be taken individually on the extent of theindependence risk associated with certain activities, these judgments being taken inthe context of the individual client and the firm. Such judgments will principally bemade within the firm, supported hopefully in consultation with a client’s auditcommittee or other corporate oversight board. However, non-compliance with theframework would only be picked up if the specific case was subject to regulatoryoversight. Further disclosure of the composition of the NAS fee would enableobservers to form some judgments about the appropriateness of the services beingprovided.3.5 Overall economic dependenceEconomic dependence is not covered in Tables 3.1 and 3.2 as this is a wider issuethan NAS. Four frameworks offer various guidelines about the level of economicdependence an auditor should have on one audit client, which includes non-audit fees.The UK normally requires the total income from a listed company to be less than10%. There is no direct prohibition but it is strongly discouraged, and the audit wouldbe expected to be subject to a high level of safeguards within a firm to justify itsretention. The EC, interestingly, spreads the calculation of economic dependence overan average of five years but does not specify the actual level of fee dependence. IFACand Australia do not specify a level of fee dependence but indicate that thedependence should be judged on recurring fees.Given that the UK’s 10% overall and specific economic dependence levels are seen assuch significant factors undermining auditor independence by those close to the auditprocess, there is a case for this level to be reviewed. There is also a case for reviewinghow journalists’ perceptions that high levels of NAS undermine independence can beaddressed.3.6 Small companies3.6.1 Market structureFor the year ended December 2000 there were 8,626 firms of auditors registered withICAEW, ICAS and ICAI (ICAEW, 2001b), 88% of which have four partners or less.ACCA has 3242 Registered Auditor Entities (ACCA 2001). The ACCA numberduplicates some of the firms registered with the other bodies, as it includes firms22
Page 5 and 6: LIST OF TABLESPage3.1 Definitions a
Page 7 and 8: LIST OF ABBREVIATIONSACCAAICPAAPBAR
Page 9 and 10: Auditor Independence and Non-audit
Page 11 and 12: 2.2 Current regulatory frameworks:
Page 13 and 14: There is limited evidence that, in
Page 15 and 16: firms have, over the last 10 years,
Page 17 and 18: CHAPTER 2AUDITOR INDEPENDENCE2.1 In
Page 19 and 20: low cost strategies to protect and/
Page 21 and 22: • the costs of auditor switching
Page 23 and 24: Johnstone, Sutton and Warfield (200
Page 25 and 26: estrictive. Nevertheless, these stu
Page 27 and 28: 3.3 Independence in professional an
Page 29 and 30: Table 3.1 (cont.): Definitions and
Page 31 and 32: followed by a detailed set of rules
Page 33: Provision of some of these services
Page 37 and 38: of taking management decisions, sel
Page 39 and 40: pieces. While a few research-relate
Page 41 and 42: CHAPTER 5DESCRIPTIVE STUDIES OF NAT
Page 43 and 44: Ezzamel, Gwilliam and Holland (2002
Page 45 and 46: Parkash and Venable’s (1993) stud
Page 47 and 48: CHAPTER 7IMPACT OF JOINT PROVISION
Page 49 and 50: affirmative to five type of service
Page 51 and 52: McKinley, Pany and Reckers (1985) u
Page 53 and 54: NAS and audit fees regardless of th
Page 55 and 56: 7.3.5 New Zealand studiesGul (1989)
Page 57 and 58: support those of Corless and Parker
Page 59 and 60: CHAPTER 8ASSOCIATIONS BETWEEN JOINT
Page 61 and 62: an independent variable in the audi
Page 63 and 64: Ezzamel, Gwilliam and Holland (2002
Page 65 and 66: 8.7 Auditor tenure and auditor chan
Page 67 and 68: CHAPTER 9EVIDENCE OF ASSOCIATION BE
Page 69 and 70: CHAPTER 10EVIDENCE OF ASSOCIATION B
Page 71 and 72: 10.3.3 Australian studiesGul and Ts
Page 73 and 74: the frameworks are generally imprec
Page 75 and 76: publicly available data of relevanc
Page 77 and 78: Antle, R. and Demski, J.S. (1991),
Page 79 and 80: Craswell, A.T., Stokes, D.J. and La
Page 81 and 82: Frankel, R.M., Johnson, M.F. and Ne
Page 83 and 84: Jeppesen, K.K. (1998), ‘Reinventi
Page 85 and 86:
O’Sullivan, N. and Diacon, S.R. (
Page 87 and 88:
Schuetze, W.P. (1994), ‘A Mountai
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Auditor independence and non-audit services - ICAEW

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