Tuesday, February 15, 2011

Auditors and Consulting: Claims Of No Conflict Strain Credibility

Via Francine McKenna.
The financial crisis and companies concerns over costs have driven audit fees to flat or down in all the firms, on average, worldwide. However, the independence issues that led three of the four to sell their consulting businesses by 2002 still exist, even more so with the contraction in the number of firms available in many markets to take on larger and more complex non-audit projects and engagements.
At the same time, the audit firms are behaving as if the requirement to be independent at all times is an annoyance rather than an impediment. That may be because auditors are not strictly prohibited from consulting in the UK, for example, as long as the company isn’t listed in the US. But since the PCAOB only recently gained inspection access to UK firms, we may find lax compliance once they catch up on inspections. For non- Sarbanes-Oxley companies, UK firms accept consulting engagements for audit clients at will and with only honor to guide them.
In the United States, in spite of prohibitions on a list of advisory services that can be performed by auditors of companies subject to Sarbanes-Oxley, the level of enforcement of these independence prohibitions is practically nil. Not only are the regulators loathe to single out a firm for large transgressions, they have limited time and budgets available to track them down at all, especially because of new the volume of matters generated by the financial crisis.
The hunger for more consulting revenue also causes the audit firms to forget they are audit firms first and foremost.  Aggressive sales activities and “relationship building” tactics common in the systems integrator business are tolerated by the audit firms for the sake of winning major long term engagements with prestige clients and realizing the return on big acquisition and practice-building investments.
Outside the US, the prohibitions in some countries on foreign ownership of their audit partnerships is breaking down and the international firms are taking control of everything else away from local partners who “cannot realize the growth potential.”
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