THE PROVISION OF NON-AUDIT SERVICES FOR AUDIT CLIENTS

Topics: Accounting scandals, Audit, Enron Pages: 24 (2923 words) Published: July 7, 2015
University of Bedfordshire,
UK

THE PROVISION OF NON-AUDIT SERVICES FOR AUDIT CLIENTS

Name: Chua Ei Lin

Student ID:0924210

Module Title:Audit

Module coordinator’s name:Veeramani Ramasami

Submission due date:5 November 2010
Content

Page

1. Introduction

2. What is Non-Audit Services (NAS)

3. Impact of NAS to the business world

Pre collapse of Enron Corporation

Post collapse of Enron Corporation

4. Case studies

WorldCom, USA

5. Conclusion

6. References

1. Introduction

Auditors’ independence is the foundation of the auditing profession, a vital part in the statutory corporate reporting. It is also a key requirement for the addition of credibility to an audited financial statement. However, recent accounting scandals, for instance Enron Corporation in the United States and Northern Rock in the United Kingdom, have cast uncertainty on the auditors’ independence and the true meaning of auditing. Predominantly, the monetary dependence (financial dependence) consequential from the provision of non-audit services (NAS), the relaxed attitude cultivate from prolonged auditor tenure (the “familiarity” threat), and personal contact build throughout the employees of the corporation have been so-called to be a factor to this corrosion of auditors’ sovereignty. In order to restore public confidence, guiding principle like compulsory regular change of audit partner and prohibition/disclosure of certain NAS by regulators in the US (Sarbanes Oxley Act, 2002) and the UK (Combined Code of Corporate Governance). The lawmaking involvement, nevertheless, have taken its place despite inadequate pragmatic evidence of the mentioned threats to auditors’ independence. Besides, key question essential to this argument stay unanswered. For example, “How do the financial and familiarity threats involving auditors and clients influence the auditors’ independence?”. This assignment will counter the question above. It intends to discover whether the auditors’ independence impinge by NAS. 2. What is Non-Audit Services (NAS)

NAS are services which are provided by external auditors other than the mandatory statutory audit required by every company. The surfacing of professional service firms in latest years has the effect from a rising demand from businesses for professional advice to assist the corporation to attain business advantage in a more and more aggressive market situation. A good deal of this advice is demanded from audit practice, firstly, as auditors are taught to comprehend the dynamics of a trade from an peripheral point of view and also because independent viewpoint can frequently shed light on predicament that may seem difficult from within an organisation.

There are many different types of NAS in the industry currently. Earlier to the implementation of the Sarbanes-Oxley Act (SOX), there was some misunderstanding over what types of non-auditing services the external auditor could carry out for its client. In recent years, some of the major accounting firms sold their consulting units in order to shun any probable conflicts of interest. The SOX attempts to eradicate identifiable possible conflicts of interest surfacing of NAS and confers more control to the Audit Committee. The SOX unambiguously disallows great level, large fee financial information systems constructions and execution or information technology job as these are very lofty revenue spot for the NAS of the big firms. The SOX also prohibit internal audit outsourcing and "specialised" services.

2.What is Non-Audit Services (NAS) (cont’d)

The lay out underneath are the 9 prohibited activities for a firm providing an independent audit of a company:

SOX press on to provide that a firm may be appointed in any NAS, as well as tax services, that is not illustrated in the preceding 9 activities, as long as the activity is agreed beforehand by the Audit...
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