relationship between consulting services and unethical behaviour


The accounting scandal on Enron leads to SOX 2002, a lot of people claims that the reason of this scandal arises is due to the lack of independence and conflict of interest by providing consulting services to their audit clients. Hence, the question of whether the rise of consulting services in accounting firm will increase unethical behaviour before SOX 2002 has to be examined. In order examine this question; the definition of consulting services and the role of accountants have to be defined.

Definition of consulting services

Before 1992, CPA consulting services are known as management consulting services, management advisory services, business advisory services, or management services.

"In order to assist CPAs to identify what functions make up consulting services, the AICPA issued the first statement on Standard of Consulting Services (SSCS) on Jan 1, 2002 to provide guidance concerning CPA responsibilities when they are involved in consulting engagements." [1] 

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"Consulting services are defined as professional services that employ the practitioner's technical skills, education, observations, experiences and knowledge of the consulting process." [2] 

Worth of accountants

According to Mednick, Robert; Previts, Gary John, they claimed that "Experience and competence underlie the value of CPA services. Another principal component of worth, namely, independence, was also identified early in the literature of accounting firms" [3] 

"Chairman Arthur Levitt asserts that independence is the core of the accounting profession…the space to think, to speak, and to act on the truth. And truth is the lifeblood of investor confidence." [4] 

Besides the experience and competence of an accountant, the independence of them is the most important value. This ensures that accountants especially the auditors to provide a free of bias audit opinion.

History on the rise in consulting services

"From the earliest days of profession, accounting firms rendered consulting services. By the 1910s, they included the installation of factory costs systems, studies of organizational efficiency, investigations in connection with possible investments in other businesses, and an array of other services to management. … But accounting, auditing, and taxation constituted the solid core of the firms' services" [5] 

"Following the Second World War, the major accounting firms began to develop capabilities in new information-based services, gradually expanding beyond their traditional services of accounting, auditing, taxation, and systems design and installation. They chose to describe this new line as management services, management advisory services or administrative services."

In the 1950s, it already becomes common for professional to discuss on CPA as a business consultant.

Furthermore, in 1991, Lentini, Fern had written an article on the journal of accountancy that claim that "CPAs can improve their clients' business and their own firms by offering business advice."

It is important for CPA firms to develop and attract new business due to the loss of market share and the high competitions and high costs that CPA firms.

"For many small to midsized firms, it is no longer enough to provide only traditional services in today's competitive market. Individual practitioners and small to mid-size firms that have not already done so must develop new areas of business consulting while retaining their passion for numbers and financial statements." [6] 

Impact of accounting firms

The growth of consulting services in the Big Eight firms from the mid-1970s onward was palpable: consulting fees as a percentage of total gross firm fees had increased from a range of 5% to 19% in 1977, to a range of 11% to 28% in 1984. [7] 

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Even by 1978, six of the big eight firms placed in the top 10US consulting firms in terms of gross billings for consulting services. [8] 

Since the rise of consulting services lead to huge concern on the value of independence of accounting, there are some arguments from professional that consulting services do benefit accountants as well as the accounting firm.

Arguments - pros of consulting services to accounting firm

"Practicing accountants argue that the provision of nonaudit services does not impair auditors' independence because they have strong economic and legal incentives to remain independent and preserve their reputations. In addition, they maintain that nonaudit services improve the quality of audits as auditors become more knowledgeable and develop greater expertise concerning the clients' businesses and operations." [9] 

"Previous studies contend that both audit and nonaudit services may create the same incentive effects on auditors, and that independence might also be impaired when both audit and nonaudit services constitute profitable business for the auditor" [10] This shows that not only nonaudit services will impair independence but also audit services when there is a fee associate with them. Hence, any accounting business will impair independence, so consulting services will not be the only reason that unethical behaviour will arise in accounting firm.

However, on the other hand of the arguments, there is clear evidence that consulting services impairment the value of independent and lead to conflict of interest.


"Traditionally defined by the profession as the ability to act with integrity and objectivity. [11] 

The AICPA's Professional Standards "require CPA to retain their integrity and objectivity in all phases of their practice and, when expressing opinions on financial statements, avoid involvement in situations that would impair the creditability of their independence" [12] 

However, consulting services creates economic bond between the client and the auditor.

The accounting profession maintains that it erects a Chinese wall between its auditing and consulting arms so that auditors can objectively judge a client's decisions. And big accounting firms note that other CPA firms do the audit work for between 60% and 90% of their consulting clients. But that leaves 10% to 40% of their audit clients as consulting customers, and some competitors maintain the credibility gap is widening over whether the accountants can keep consulting and auditing separate." [13] 

Evidence shows that consulting services provide significant profit to accounting firm and impair their independence. This will also increase the risk of unethical behaviour.

Accounting case


Brief summary of Enron case in accounting profession perceptive

Enron as one of the high-profile scandal in accounting industry leads to the big concern on independent of consulting services and audit.

This case leads to SOX 2002.

SOX 2002

"Section 201 provides a seemingly definitive list of what constitutes prohibited non-audit services, it is noticeable that in its Final Rules on the implementation of section 201 the sec felt it necessary to add many pages of clarification on what the services listed as prohibited in the legislation actually constitute. Additionally, the Final Rules also felt compelled to institute a further layer of control by making the audit committee responsible for determining what other services on a particular engagement might be inappropriate." [14] 

The Commission's principles of independence with respect to services provided by auditors are largely predicated on three basic principles, violations of which would impair the auditor's independence: (1) an auditor cannot function in the role of management, (2) an auditor cannot audit his or her own work, and (3) an auditor cannot serve in an advocacy role for his or her client. [15] 

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SOX 2002 comes into effective after the Enron scandal and regulates the relationship between consulting services and accounting firm.


Did it really lead to unethical behaviour?

Consulting services might not directly lead to unethical behaviour, however, it increase the risk of unethical behaviour will increase.

Consulting services impair independence which is one of the most important value of accountants.

The more connection and economic bond with the audit client, it will impair the independence and creates conflict of interest.

What other rules and regulations

In November 2002, the SEC adopted new rules that prohibit accounting firms from providing certain non-audit "consulting" services to their audit clients. The rule also requires public companies to disclose in their proxy statements the fees paid to their independent auditors for audit and non-audit services. [16] 

Codes of professional conduct - accountants have to be maintaining independence in fact and in appearance.