The professional standards i.e. International Ethics Standard Board for Accounting (IESBA) enables a company’s auditors to provide tax services and retain their independence. The standards give permission to audit firms to provide non-audit services if the provision of services does not conflict with the independence needs of auditors. The non-audit services are known as permissible non-audit services ranging from professional advice related to transactions, tax services, and advisory services regarding business activities. The tax services include assistance related to tax return preparation, tax calculations to prepare transactions, and planning and resolution of tax disputes. Absence of conflict enables auditors to provide tax services, while retaining their independence (ICAEW, 2016a).
In relation to accounting frauds by the auditing firms, Sarbanes-Oxley Act’s provisions of auditor independence limited the choice of auditors of public company. The main reason behind the provisions is the audit and non-audit services provided by Arthur Andersen audit firm to Enron that led to high profits in terms of non-audit fee. Hence, the Sarbanes-Oxley Act prohibited auditors to provide non-audit services for the public companies like bookkeeping, financial information system design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing services, management functions, broker or dealer services, legal services regarding audit and other contingent services that are based on the practical situation (Jin, 2012 p. 17).
Another provision of the Act is the necessary audit rotation and the rule of 1-year. It indicates continuous rotation of audit partner and necessary audit company’s rotation to overcome the issue of reduction in audit independence due to long-term relationship with the audit clients. Moreover, it is identified by GAO that the CEO, CFO, controller, chief accounting officer and individual with same level of position cannot be appointed by the company’s audit firm during the period of 1-year of proceeding of the audit (Franzel, 2004).
However, there are various advantages and disadvantages of allowing auditors to provide non-auditors services, including tax services to client. One of the advantages is that the firms can get specialist advice from the experienced auditors to get advantages in a competitive business environment. In addition, the firms are able to get advice related to non-audit aspects from external perspective. Moreover, independent opinion identifies the issues that may not be noticed by the organization by itself. The disadvantages of getting non-audit services from auditors include conflict of interest, biased audits, reports with errors and regulatory issue. Conflict of interest is related to difference between private interests and roles as part of trust (ICAEW, 2016b).
The smaller number of major, international accounting firms leads to less competitive market in relation to audit service from the perspective of client. In addition, they offer the firms with high levels of pricing power. Moreover, they are unable to provide wide range of non-audit services to the public companies. Furthermore, smaller number of major international accounting firms’ impact on the public companies involves the requirement for public companies to appoint smaller audit firms. The main reason is the inability of smaller number of major firms to handle excess capacity produced by expiration of major international accounting firms (GAO, 2008).
References
Franzel, J. M. (2004). Public Accounting Firms: Required Study on The Potential Effects Of Mandatory Audit Firm Rotation. USA: DIANE Publishing.
GAO. (2008). AUDITS OF PUBLIC COMPANIES: Continued Concentration in Audit Market for Large Public Companies Does Not Call for Immediate Action. Retrieved from: http://www.gao.gov/assets/280/270953.pdf
ICAEW. (2016a). Code of Ethics B section 290. Retrieved from: http://www.icaew.com/en/membership/regulations-standards-and-guidance/ethics/code-of-ethics-b/part-b-290
ICAEW. (2016b). The provision of non-audit services to audit clients. Retrieved from: http://www.icaew.com/en/technical/ethics/auditor-independence/provision-of-non-audit-services-to-audit-clients
Jin, Y. (2012). The Sarbanes-Oxley Act: effects on public accounting firms. Retrieved from: http://utdr.utoledo.edu/cgi/viewcontent.cgi?article=1362&context=theses-dissertations
