Auditor independence and non-audit services - ICAEW

McKinley, Pany and Reckers (1985) use a between–subjects (i.e., non-repeated)design, which reduces the risk of ‘demand effects’, i.e., subjects seeing the purpose ofthe study and responding in the manner they think is expected by the researcher (seefootnote 11 above). They examine the influence of three factors: CPA firm type (BigEight/non-Big Eight); office size (large/medium) and prior provision of NAS (none or30% of audit fee). Loan officers were asked to make decisions whether to accept orreject a loan based on financial statements and to indicate their level of confidence (ona 10-point scale) in the reliability of financial statements and in the auditor’sindependence. NAS provision did not affect any of the response variables, contrary toall prior research. This lack of significance suggests that demand effects may havecaused the findings of prior research.Knapp (1985) defines independence as ‘the auditor’s ability to resist client pressure’.He investigates the impact of four factors (including NAS provision at the level of 0%and 40%) on loan officers’ perceptions using a full factorial, repeated measuresdesign. NAS provision is significant, but explains only 2% of the variance inresponses.Pany and Reckers (1988) was one of the first studies to explore the effect of themagnitude of NAS (at the levels of 0%, 25%, 60%, and 90% of the audit fee). Theyfind that the level of NAS influence only two of the requested 15 decisions (a loandecision and a 12-month investment safety decision).Schleifer and Shockley (1990) examine users’ and auditors’ reactions (agree,undecided or disagree) to a range of policies designed to enhance auditorindependence, two of which relate to NAS. The prohibition of executive searchservices to audit clients is one policy. Another is the requirement to disclose thenature of other services provided by the auditor. In relation to the former policy, themajority of Big Eight auditors and financial analysts disagree (59% and 58%,respectively), whereas only 37% of non-Big Eight CPAs and 23% of loan officersdisagree. In relation to the disclosure policy, the majority of Big Eight auditors andfinancial analysts disagree (64%), but the majority of all other groups agree (83% offinancial analysts, 58% of non-Big Eight CPAs and 88% of loan officers. Thenumbers responding in each group are, however, very small (22 maximum).Bartlett (1993) examines the views of loan officers and CPAs in relation to 10situations, five of which relate to NAS provision. Respondents were asked to indicate,on a continuous scale of 100 (completely independent) to 0 (not independent at all),how independent they felt the CPA was. The situation where only auditing servicesare presented serves as a benchmark. The four NAS considered are: design ofaccounting systems; executive search and hiring of CEO; acquisition investigation;and assistance with accounting decisions. Benchmarks scores were 89 and 94 for loanofficers and CPAs, respectively. For both groups, the provision of executive searchresults in the lowest independence scores (54 for loan officers and 75 for CPAs),while assistance with accounting decisions results in the highest scores (71 for loanofficers and 84 for CPAs). Only the fact of provision (at some level) rather than themagnitude of the NAS provision is considered in this study.In recent years, accounting firms have sought to provide a broad range of specialisedprofessional services. This has led to an increase in co-contracting with non-38