Auditor independence and non-audit services - ICAEW

accounting firms. The issues are discussed in Lowe and Pany (1994). Empiricalevidence as to whether audit firms’ provision of NAS with, rather than for, a clientcompany affects perceptions of auditor independence is provided in Lowe and Pany(1995 and 1996). Lowe and Pany (1995) find that loan officers’ perceptions ofauditors’ independence were significantly affected by the materiality of theengagement (negative impact) and by staff separation (positive impact).Bartlett (1997) examines perceptions of auditor independence in five differentscenarios involving potential conflicts of interest. Case four involves the provision ofNAS (specifically a purchase investigation audit that gives rise to a self-review threatand pressure from management to violate GAAP). 76 CPAs and 48 bankersparticipated. Over half of the bankers felt that the auditor would compromise hisindependence, compared to 69% of CPAs who felt that they would not.Engle and Sincich (1998) explore auditor’s views regarding violations of the AICPA’sCode of Professional Conduct Rule 101. Fifteen independence-related ethicalviolations are identified, including the risk that NAS inappropriately influenced auditjudgements. Of the 897 respondents, 12.3% felt that such an influence occurred.Lowe, Geiger and Pany (1999) examine the implications of various internal auditoutsourcing arrangements. Based on a survey of 177 loan officers, they find that thehighest ratings of auditor independence occurred when the company’s CPA firm usedseparate staff members to perform the internal auditing services, with the overalleffect of such joint provision being positive.A recent SEC rule permits firms to outsource no more than 40% of the internal auditfunction to their own audit firm. Swanger and Chewning (2001) explore the impact offive different internal audit outsourcing arrangements on the auditor independenceperceptions of 250 financial analysts. It is found that, provided there is staffseparation, perceptions are not adversely affected. Respondents did not perceive adifference between partial and full outsourcing.In a poll conducted by Penn, Schoen and Berland Associates (2000), it was found thatover 80% of investors believe that audits are ‘better’ when the auditors know moreabout a company (as might be the case when auditors provide NAS). In addition, 59%believed that audit quality might suffer as a result of the new SEC rules becauseauditors will be less knowledgable about their client’s business.A survey commissioned by the ISB indicated that respondents believed that theevolution of audit firms into consulting fields was logical and the provision of mostconsulting services was not likely to create real problem of independence (reported inKornish and Levine, 2000, note 2).Jenkins & Krawczyk (2000) is the latest US study and it focuses on the impact of jointNAS provision. Both the materiality of the NAS fee (material or nominal – 40% and3%, respectively) and the type of NAS performed (actuarial services; internal auditoutsourcing; legal services; and software training) were varied. 323 investors andauditors took part. This study finds that joint provision has a positive effect onparticipants’ perceptions of auditor independence, with the influence being strongestfor Big 5 auditors. It is also found that investors favoured disclosure of the amount of39