Provision of non-audit services

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Recently of corporate collapse in the Australia, US, and elsewhere, regulatory attention has been drawn to the published of auditor provided non-audit services (NAS) and audit client relationship. This assignment aims to debate on independence auditor provide evidence relationship between non audit services and consulting services at a lower cost for their audit clients.

In tracking the development and identify the key stages and the changes that took place in approaches to external auditing. The two listed companies selected for arguments are Enron Corporation versus Chartered Semiconductor Manufacturing Ltd.10

Enron Corporation was an American energy company based in Huston, Texas. It was one of the world's leading electricity, nature gas and communications companies.6

Chartered Semiconductor Manufacturing Ltd (Chartered) is one of the world's top dedicated semiconductor foundries in Singapore. It provides comprehensive wafer fabrication services and technologies to semiconductor supplier and system companies.

They are taken a reference for the arguments that influenced by the changes which have reported and analyses the effect. Research on non audit service provision impairs auditor independence, differential incentives drive auditor behavior.


Auditor independence is a cornerstone of the auditing profession, a crucial element in the statutory corporate reporting process and a key prerequisite for the adding of value to an audited financial statement (Mautz and Sharaf, 1961). However, recent account scandals, involving corporations such as Enron in the US, HIH Insurance in Australia have cast doubt over the independence of auditors and overall value of auditing.

These legislative interventions have occurred despite a limited and mixed empirical evidence of these proposed threats to auditor independence. Furthermore, some basic questions underlying this debate remain unresolved. For example, “What factors influence a company's decision to purchase NAS from its incumbent auditor?'10

The provision of NAS is diminishing investors' judgments in audit quality and independence auditor but not their auditor knowledge and financial statement reliability judgment. This assignment have consider two areas of literature which relating the theories and model of auditor independence. It also relevance on NAS found in current professional, regulatory frameworks, reviewed and summarized original theoretical and empirical studies.

The Big Five audit firms (Ernst & Young, Arthur Anderson, Deloitte & Touche, PricewaterhouseCoppers and KPMG) charger higher audit fees for initial engagement. It has rediction that where audit fees are disclosed publicly. The audit firms try to lower their audit fees and try to provide more lucrative non audit services for the client. It is no actual loss of audit independence despite the loss of perceived independence of the Big 5 firms.

Today market audit firm provide the provision of NAS for their audit clients are popular and continuous debate over auditor independence. NAS may include consulting service such as systems design, compliance-related service, taxation, book-keeping; design and implementation of financial systems; actuarial service; internal audit outsourcing service; management functions or human resources; dealer and investment advisor.

The emerged from the Enron collapse has been the extent to which audit firms are providing NAS to their audit clients. The fees generated by NAS have been rising more rapidly than audit fees. This has led to widespread beliefs that provision of NAS can cause the auditors to compromise their independence. There are two main concerns which auditors may not stand up to management because they wish to retain the additional income from NAS which is in management's gift. Second provision of service may lead the auditor to indentify too closely with management and lose skepticism.

The remain contain are organized as follows:

 Contain background and literature review
 Develops the hypotheses and research questions,
 Contains the conclusions.


Auditor must preserve independence in mental attitude for all matter relating to the assignment which stated by Generally Accepted Auditing Standards (GAAS). Independence auditors furnish critical assurance that the financial statement have been examined by “an objective, impartial and skilled professional” (SEC 2000,p.2)10. It looks as risks continue rather than an absolute and judgment about the seriousness of the threat to independence which balance against the effectiveness of the safeguards available.

Independence maintained through external constraints (e.g, legislation and regulation) and profession itself for maintain the independence to preserve its market value (Kinney 1999)3. It appears uncertain of auditor ability to accept client pressure and emphasizing the effect of the economic interest. Its calls that consulting services as “the tail that wags the dog” in the accounting industry (Investment New Article, Nov 20, 2000)10.

The SEC announce the new rule that the auditor independence required to disclosure audit fee in their proxy statement, while total fees which billed for services rendered by the principal accountant (the external audit firm) to separate into three categories as information technology services , audit services, and all other services. It almost all audit firm purchases non audit services for their audit client.

Even though the big 5 auditing firm continue to sustain their independence which not impaired by NAS, latterly problems at Enron, WorldCom and other public firm brought accounting and auditing concerns to the attention of Congress and the public. Newly passed legislation prohibits NAS, including financial information services and internal auditing services (Sarbanes-Oxley Act 2002)10.

Non audit services (NAS) are defined as all services provided by an auditor not considered as an audit. The Sarbanes Oxley Act (SOX) reduce the number of non audit services that an auditor are required pre-approval by the audit committee of such extended engagement (Rouse, 2005).

Most banned services on consulting or advisory services might create conflict of interests for independent auditors (Banham, 2003). The banned NAS include:

1. Book-keeping or other services

- the auditor considered not independent when provides book-keeping services or other service related to the accounting records and financial statement for audit client. It involves an inherent conflict of interest, auditor should investigate accounting records or financial statements prepared appropriate.

2. Internal audit outsourcing services

– under generally accepted auditing standards, auditor determine the effectiveness of internal control system over financial reporting, to create another example of conflict of interest. For example, Arthur Anderson provided internal control function for Enron, before it was banned by 2000 SEC rule, it was blamed for not improving Enron's ineffective control system.

3. Expert services unrelated to audit

– providing an expert opinion and other service for audit client to advocating an audit client' interests in litigation, regulatory, administrative proceeding and investigation.

4. Design and implementation of accounting systems

– its create inherent conflict of interest, as an auditor required to determine the effectiveness of design and implementation accounting system. Many big accounting firms was immensely popular provide a consulting services by installing a computerized accounting system for client

5. Management functions acting

– temporarily or permanently act as director, officer, employee of an audit client in performing any decision making, supervisory or ongoing monitoring function for audit client.

These services can provide by the incumbent audit firm or external audit firm. This provision NAS lead to a lack of actual independence and therefore lead to audit failure.


One of the major public concerns which emerged from the Enron collapse has been the extent to which audit firms are providing non audit services (NAS) to their audit clients.

In 1997, Enron engaged Arthur Andersen as its External Auditor. Subsequently, Enron also appointed Arthur Anderson as consultant. Enron paid Andersen $52 million in 2000 in both auditing and consulting services including development of computerized financial system for conducting Enron's internal audit, but majority for consulting services. There have been many criticize about the potential conflict of interest faced by audit firms who received large consultancy fees from their audit client (e.g. Financial time 2001a). It's expressed how auditor with a statutory responsibility to company shareholders can handle a commercial relationship with the company's management and remain impartial (e.g. financial Times, 2001b).

Andersen leaders react by pushing partners to become salesman, it's to upsetting the delicate balancing act of any auditor must perform between the clients and looking out for the public investor. Peoples have forgotten their significant responsibility not only to clients but also to investor, creditors and the public, etc.

These issues by attacking the “specific symptoms of the audit breakdown that occurred in the Enron Case” (Gavious, 2007,pg458), Arthur Anderson whose Enron client found to have encouraged clients to use accounting techniques to mislead and deceive the market (Gavious,2007). Enron select to use a method of fair value accounting that misleading, overstated profits in the current period. These accounting techniques were employed by Enron on the advice of Arthur Anderson and it was the employment of these techniques that ultimately led to the organisation's collapse (Benston, 2006). Due to IT and other frauds which investors lost confidence in market (Crasewell, 1999).

Its beliefs that provision of NAS cause the auditors to compromise their independence. Andersen has been severely criticised for significant economic and its independence has been questioned form two point of view – significant economic dependence on Enron due to the party designing accounting and tax structures, and therefore it could not express an objective view on Enron's results.

The two main concerns are auditor may not stand up to management because they wish to retain the additional income from NAS which is in management gift, and second the provision of a range of services to management may lead the auditor to identify too closely with management and lose skepticism. Thus, auditor independence is fundamental to public confidence in the audit process and reliability of auditor report.

However, the problem facing by auditing profession is not a lack of actual independence and objectivity rather it is the lack of confidence in financial statements. Public confidence in a company's financial statements will only be achieved which companies remaining completely separate to their audit firms (Ronen and Cherny,2002). Thereby increasing the auditor's perceived independence.

While Chartered engagement of KPMG as its external auditor to perform non audit services which management must consider the actual, perceived and potential impact upon the independence of external audit prior to engaging external audit to undertake any non audit services.

Chartered have established the Audit Committee of the Supervisory Board (Audit Committee.) to oversight of Company's financial position. It's responsible to supervising the operation of the internal risk management and control system, codes of conduct, compliance with recommendation and observation of internal and external auditor.

In contrast, audit committee of Chartered have to consider whether the provision of such non audit services is compatible with maintaining the external auditors' independence, by obtaining assurance and confirmation that the additional services provided by external auditor are not in conflict with the audit process.

The audit committee has authority in independent audit are to be-approved with information sufficient to enable Audit Committee to know as follows:

- the precisely what services it is being asked to pre-approved,
- know that any non audit service to be performed is a permissible non audit service
- made a well-reasoned assessment of the impact of the proposed service on the auditor independence.

The external auditors are prohibited from providing specified non audit service contemporaneously with providing audit services to Chartered Semiconductor Manufacturing, including:-

- bookkeeping or services related to accounting records or financial statements
- financial information system design and implementation
- internal audit outsourcing services
- legal services an expert service unrelated to the audit

Audit committee has clarified and added further prohibited activities for the external auditor. By focus of the importance of Audit Committee in control and supervise the activities of the external auditors. It shows the Audit Committee has plans to strengthen the independence accountants are truly independence and give a greater credibility to audits.

In this research, Enron should have formed an audit committee to oversight the company and prevent any fraud which collapse to bankruptcy which compare with Chartered, although the audit firm provide non audit services, but they have a stronger and capability audit committee to oversight the company financial position.


In the debate on auditor independence, the first matter that is usually raised is the provision of non audit services to audit client.

To be able to perform their task of providing independence and objective assurance to shareholders, auditor must act independently. It is argued that by providing non-audit services to the audit client, the auditor's independence and objectivity is impaired.

In term of codes of ethics all over the world, it is not only necessary for auditors to be independence, but there is also a need for auditors to be seen to be independent, and even a perception of a conflict can compromise his or her position. It behooves the auditor therefore never to get into such a situation.

In this research, there is little empirical evidence that proves that the provision of non audit services actually impairs independence, but one must concede that it is difficult to prove. Recent corporate failures again brought this issue very much under the spotlight. As a profession, we should not underestimate the public feeling and the strong view held by governments on this issue.

The rule of fundamentally change the way auditing profession does its business as following:

 Fundamental shift in regulating accounting industry – from the primarily self-regulated environment to public regulation approach.

 A new set of independence rules and regulations affects the accounting profession directly in performing audit engagement.

 A new independent public oversight board now has the direct authority to police audit process, auditing standards, and disciplinary measure on auditors, including

o registering public accounting firms that issue audit report for publicly(trade companies),
o establishing auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports
o operate inspections of registered public accounting firms
o operate investigations and disciplinary proceeding and imposing appropriate sanctions on audit firms and auditors.

An independent oversight board (IOB) set up by Andersen in the US , after the Enron problems emerged but before the firm collapsed, recommended that some consulting services provided by the firm should be separated into partnerships managed independently form audit partners and without financial independence to audit clients. Recommendation was strengthen of internal quality control over auditing thought out the firm.

Beside this it's create independent regulatory to oversight agency in accounting industry. Present no truly independent agency with the authority, unethical conduct watches the watchdogs, power, enforce penalties against illegal. While the Public Oversight Board was a nominally independent private body which set a standards for the industry's self-regulatory schemes, it was never truly independent.11 The finding comes from the America Institute of Certified Public Accountants.

At the point of view, the evidence show there is no correlation between levels of non-audit fee and audit failure, it include such as safeguards and rules separation of non-audit services seems mostly increase the cost and reduce the quality of the audit. This suggestion should not be pursued. Assuming none influence economic dependence in results of the auditor/client relationship and adequate safeguards can be implemented. We believe that all companies should determine whether they use auditors for non audit services, in consultation with the profession's guidelines.


1. Ashbaugh,H.,R.LaFond,and B.Mayhew.2003. Do non-audit services compromise auditor independence? Further evidence. The Accounting Review 78: 611-639.1

2. Arthur Andersen and Enro: Positive Influence on the Accounting Industry 2
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3. Audit and Non Audit Services Pre-Approval Policy 3
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4. “Audit” vs. “non-audit” tax services under Sarbanes-Oxley 4
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5. Auditor Independence-General (for APB Ethical Standards 5
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http/ Technical_and_Business

6. Enron profile 6
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7. SEC(United States Securities and Exchange Commission) (2000) “ Final Rule: Revision of the Commission's Auditor Independence Requirements”. 7
Available at: htm

8. Simunic, D.A.(1984) “Auditing, consulting and auditor independence”, Journal of Accounting Research, 22(Autumn):679-702 8

9. The US Sarbanes-Oxley Act of 2002: Reforming corporate governance and disclosure 9
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10. Threats To Auditor Independence: The Impact of Non Audit Services Tenure and Alumni Affiliation 10
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11. Why we need to create an independence regulatory oversight agency for accounting industry 11
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