Auditor independence and non-audit services - ICAEW

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