Auditor independence and non-audit services - ICAEW

Auditor Independence and Non-audit Services:A Literature ReviewEXECUTIVE SUMMARY1. INTRODUCTIONThis executive summary is divided into three sections. This section sets out themotivation and scope of the study. Section 2 summarises the key findings and section3 offers conclusions1.1 Motivation for this studyOne of the major public concerns which has emerged from the Enron collapse hasbeen the extent to which audit firms are providing non-audit services (NAS) to theiraudit clients. The fees generated by NAS have been rising more rapidly than auditfees. This has led to widespread beliefs that provision of NAS can cause the auditorsto compromise their independence. There are two main concerns. First, auditors maynot stand up to management because they wish to retain the additional income fromNAS which is in management’s gift and, second, the provision of a range of servicesto management may lead the auditor to identify too closely with management and losescepticism. NAS may include consulting services such as systems design,compliance-related services, such as taxation and accounting advice, and assurancerelatedservices, such as due diligence.Because of public concerns about possible links between the provision of NAS andauditor independence, the Institute of Chartered Accountants in England and Wales(ICAEW) asked us, as independent academics, to conduct a review of ‘availableresearch, professional and academic, on the provision of non-audit services by auditfirms to audit clients’.1.2 The scope of this studyWe have conducted a comprehensive search of recognised databases both forpublished and recently written unpublished studies into NAS. We have reviewed andsummarised original theoretical and empirical studies but we have excludedcommentaries and opinion pieces. In order to set this review in context, we have alsoconsidered two areas of literature relating to auditor independence, being theories andmodels of auditor independence which have relevance to NAS, and the provisionsrelating to independence and NAS found in current professional and regulatoryframeworks.1.3 Academic research into auditor independence and NASThe audit process (i.e. the means by which an audit opinion is reached) is notpublicly observable and access by researchers to real-life situations on a significantscale is not possible. Researchers, therefore, have adopted other methods ofinvestigation. These include: theory development; mathematical models;questionnaire studies; case studies; experiments with groups of participants usingartificially created datasets; and statistical analyses of data from publicly availablesources, mainly published financial information.ix