Provision of Non Audit Services by the Auditor to the Audit Client Is Essay

Provision of Non Audit Services by the Auditor to the Audit Client Is a Threat to Auditors' Independence - Essay Example Introduction The value of an audited financial statement depends on the auditor’s independence. Accounting scandals such as Enron of the United States as well as HIH Insurance of Australia have created doubts regarding auditor’s independence and the value of their audit. The familiarity that is developed from the long audit tenure and the economic dependence arising from the non audit services and social bond developed between the auditor and the auditor’s client through long-term association have raised questions regarding auditor independence (Carson & Simnett, 2006). Non Audit Services (NAS) are also identified as ‘management advisory services’. Regulators believe that non audit services provided to audit clients is a serious threat to the auditors’ independence. Regulators believe that conflicts of interest occur and fee dependence has a damaging affect on auditor independence. Audit firms often defend themselves by saying that fee depende nce does not influence them and audit and non audit services are performed independently by separate staff (Houghton & Ikin, 2001). It is also opined that non auditing services help in reduction of total costs, improve technical competence and intensify competition. The audit firms, the audit clients and regulatory bodies can bring about efficient services mix through market interaction (Arrunada, 1999). 2. Literature Review 2.1 Non Audit Services of Auditors The services that external auditors provide to their clients can be categorised into consulting, tax and audit. Consulting and tax are often referred as non audit services. Section 201 of the Sarbanes Oxley Act lays down the services which the external audit firm should not perform. They cannot perform bookkeeping services related to financial statements and accounting records. They cannot design or implement financial information systems. They cannot perform valuation or appraisal services, actuarial services, management funct ions, legal services, litigation or administration related expert services. The auditor is also prohibited from providing marketing and planning related non audit services to the audit client and tax services to the management team or the family members of the team (Burke & et. al., 2008). 2.2 Threat to Auditor’s Independence It is believed that NAS services of auditors change their role from that of an outsider who can take a transparent view to that of an insider who actively participates in the decision making and acts as an advisor. The economic bond that is created between the audit client and the auditor through their contract hampers the auditor’s independence. In order to carry out a comprehensive analysis of the independence of auditors, it is essential to examine the marginal fee dependence that results from the NAS services in addition to the total fee dependence. It has been stated that auditors should factually as well as in terms of appearance, be indepen dent. NAS has an impact on the perception regarding the independence of auditors and it creates doubt regarding the authenticity of the auditor’s information (Francis, 2006). Legislations have banned the provision of several NAS by auditors for preserving the auditor’s independence. Regulators believed that auditors could go to the extent of sacrificing their independence in order to retain clients who pay large non audit fees (Defond & et. al., 2002) The various threats