Non-Audit Services

10 October 2016

Write a two page, double-spaced summary addressing the question – “Explain any dangers which may result from auditors providing ‘additional services’ to auditees”? Non-audit services (NAS) may be any services other than audit provided to an audit client by an incumbent auditor. Such services may be referred to in the professional and academic press as management advisory services or consulting, but NAS also includes compliance related services (such as taxation and accounting advice) and assurance related services (such as due diligence and internal audit).

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Compliance related services are closely linked to the annual financial reporting round. In the engagement of an external financial statement audit, the auditor becomes very familiar with the client’s company, its operation in business, its accounting system, and all aspects of the affairs related to financial scope. Thus, the auditor is a qualified and experienced individual who comes to the auditee as an independent objective outsider, divorced from the day-to-day running of the entity.

These factors place the auditor in an ideal position to observe where improvements can be made. The auditor is able to advise the auditee on matters such as strengthening internal control; the development of accounting or other management information systems; and tax, investment and financial planning. Moreover, the auditor is able to provide advice on matters such as how to proceed with a share float, business acquisition or divestment, or liquidation.

The provision of these ‘additional services’ by the auditor is very valuable for the auditee. In many cases, it is the presence of these non-audit services which makes the audit an economical package from management’s point of view. The auditor may loss their independence when providing non-audit services to their clients. Providing management advisory services or the pressure to sell the non-audit services to the client may cause an auditor consciously or subconsciously to subordinate his or her judgment to a client’s desires.

Also, as non-audit services have grown, concern has been expressed that managements of audit firms may have tended to focus more on them than on auditing. Indeed, by the early years of the 21st century, fees paid by audit clients to their auditors for non-audit services had grown to such an extent that, in many instances, they exceeded the audit fee by a very significant margin. This led to concerns that the provision of such services to auditees had resulted in auditors compromising their independence; in order to avoid upsetting the ntity’s management and consequently losing lucrative non-audit work, auditors had not been sufficiently critical when performing their auditing duties. In the Enron case, it has been widely reported that Andersen received $25m in audit fees and $27m for non-audit services. There have been many criticisms about the potential conflict of interest faced by audit firms who receive large consultancy fees from their audit clients.

Concerns are expressed about how an auditor with a statutory responsibility to company shareholders can handle a commercial relationship with the company’s management and remain impartial. The professional auditor must always be alert for opportunities to be of service to his or her client while at the same time discharging conscientiously his or her responsibilities to the users of the audited financial statements.

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