Auditor independence and non-audit services - ICAEW

NAS and audit fees regardless of their level, whereas auditors favoured disclosureonly if NAS exceeded a specified threshold.7.3.2 UK studiesThere have been only four UK studies, separated in time by almost 20 years – Firth(1980; 1981), Hussey (1999) and Beattie, Brandt and Fearnley (1999). Firth (1980)examined 29 specific auditor-client relationships drawn from the ethical guidelinesbeing proposed at the time. The provision of NAS was ranked low as a threat factorfor the three chartered accountant groups, but moderately for the two user groups.Firth (1981) also focused on eight specific auditor-client relationships contained inUK ethical guidelines of the time. He asked bank lenders to make a loan decisionbased on financial statements prepared in the context of one of these relationshipsituations. Two of the eight situations concerned joint NAS provision: accountingservices and consulting services. It was found that in both situations significantlylower loan responses were given than if there had been no joint service provision.Hussey (1999) asked UK finance directors about a range of issues concerning thefamiliarity threat and auditor independence. One question asked whether auditorsshould be allowed to undertake other than audit work for the same client. Themajority agreed that joint provision should be allowed, however 20% of independentplc respondents disagreed, compared to 13% of private company respondents.The Beattie et al. (1998; 1999) study examines a large set of 45 economic andregulatory factors that could impair or enhance auditor independence, usingquestionnaire surveys of UK audit partners, finance directors and financial journalists.A high level of NAS (> 100% of audit fee) ranked among the top threat factors forusers (2 nd ) and preparers (6 th ). It ranked as 12 th = for auditors. At a level of 50% ofaudit fee, the corresponding threat rankings were 5 th , 10 th = and 17 th =, and at the levelof 25% of audit fee they dropped to 14 th , 18 th and 20 th . NAS fees also increaseeconomic dependence generally, and all groups ranked various measures of economicdependence (at the firm and office levels) among the top threat factors.Table 7.1 shows how the respondent groups ranked the relative significance of thesefactors out of a total of 24 factors that were identified as undermining independence.Interestingly, the audit partners see total economic dependence as a much moresignificant threat than the mix of fees, whereas financial journalists see it the otherway round. The finance directors are aligned with the audit partners in respect of theirperceptions of the threat of total economic dependence, but more closely aligned tothe journalists in respect of NAS. In this study NAS is taken as a generic term withoutspecification of what the services actually are.40