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Is the erosion of auditor independence a big problem?

There seems to increasing concern about the effect on auditor independence of the steady increase in consulting activities by audit firms, especially those that audit SEC firms. No one is saying the situation is as bad as it was leading up to the Enron scandal and others uncovered subsequently, but there is no denying that large CPA firms receive more revenue and earn more profit from consulting than from auditing. Their ability to provide worthwhile consulting services is a natural thing (in my opinion), but carries some risk to the integrity of the audit process. Do you consider this situation a large problem? If so, do you have suggestions for addressing it?

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

The steady increase in consulting activities is just one problem. Long standing auditor relationship is a greater problem. The timidity of auditors to commit (be responsible) themselves on the opinion (report wordings) that they issue is the biggest problem.

There is a movement now around the world to (1) advocate for auditor rotations (2) have transparent auditor reports as far as stating other business activities with the company, names of partners/auditors involved. (3) make the auditors "responsible" for the work they are doing (or the work they did not do).

Robert, a group on Linkedin that I am a member of (Boards & Advisors) have been discussing this issue for quite some time. I recommend checking out the group and maybe join.

Robert Barker
Title: Professor of Accounting
Company: Calif. State Univ., Northridge
(Professor of Accounting, Calif. State Univ., Northridge) |

Thank you, Emerson. I will check out the LinkedIn site you mentioned. I agree with you that there are more dimensions to the issue than just the one I wrote about. Bob

Anonymous
(Controller) |

I agree that long-standing auditor relationships are the greater problem. 3 companies that I have worked for have seen the following:
1) Public company with E&Y as auditor for years got a new Controller, and discussions led to prior year restatement of $4 million (significant for the company).
2) Private company with PwC as auditor for years issued clean opinion, although "shenanigans" by executives were obvious to me, as a new employee. Company went bankrupt 6 months after receiving clean opinion.
3) KPMG conducted off-site audit with no onsite fieldwork, all done through phone and email. No adjustments were proposed. I was with the company only 2 months at the time, but over the course of the next year found numerous significant adjustments.

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

All CYA'd with boilerplate wording the Independent Auditor's Report under "Management's Responsibility" and "Auditor's Responsibility".

What is it they get paid for again?

What was that definition of "fiduciary responsibility"?

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

Robert: There is a crucial difference between the situation today and back before Sarbanes Oxley. Back then, audit firms performed a lot of tax and consulting work for audit clients. Now, you will find that the vast majority of consulting services are being provided to non-audit clients. In other words, when considering the potential threat to independence, you can't just look at the aggregate revenues generated by the large firms from audit, tax, and consulting - you need to understand which services are being provided to which clients.

Dennis Milosky
Title: Senior Controller
Company: Makena Capital Management
LinkedIn Profile
(Senior Controller, Makena Capital Management) |

I agree with Stephen's comments. It is not meaningful to simply use the total consulting revenues as being a threat to independence as it relates to SEC reporting clients. The SOX restrictions limit the services that can be provided to audit clients.

However, for non SEC clients, those restrictions do not apply and those conflict of interest issues between audit and consulting services is a valid concern.

Gary Zeune
Title: Managing Director
Company: The Pros & The Cons
LinkedIn Profile
(Managing Director, The Pros & The Cons) |

Just because something is required does NOT mean that it's valuable. If audits were valuable financial statement users would pay for the audit. Since users won't pay for the audit, how valuable is it?

Next step....Pretend users will pay for the audit. If the auditor will perform the audit differently, how is the auditor independent when the client pays?

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Audit firms offering Consulting work is a natural byproduct of relationship development. I trust my auditor to help me correct deficiencies by utilizing them also as a Consultant. We all have experienced or heard about abuse. But I do not believe there is a problem with the additional service offered. I believe problems exist when your controls are weak or non-existent. The controls are the responsibility of both sides, i.e. controls at the audit firm now consulting and controls at the entity utilizing the services of the audit/consulting firm.

If an Accounting firm offers me Audit services and Consulting services from two separate teams, I do not see an issue.

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