Recently of corporate prostration in the Australia, US, and elsewhere, regulative attending has been drawn to the published of hearer provided non-audit services ( NAS ) and audit client relationship. This assignment aims to debate on independency hearer provide grounds relationship between non audit services and confer withing services at a lower cost for their audit clients.
In tracking the development and place the cardinal phases and the alterations that took topographic point in attacks to external auditing. The two listed companies selected for statements 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 universe ‘s prima electricity, nature gas and communications companies.6
Chartered Semiconductor Manufacturing Ltd ( Chartered ) is one of the universe ‘s top dedicated semiconducting material metalworkss in Singapore. It provides comprehensive wafer fiction services and engineerings to semiconductor provider and system companies.
They are taken a mention for the statements that influenced by the alterations which have reported and analyses the consequence. Research on non audit service proviso impairs hearer independency, differential inducements drive hearer behaviour.
Auditor independency is a basis of the scrutinizing profession, a important component in the statutory corporate coverage procedure and a cardinal requirement for the adding of value to an audited fiscal statement ( Mautz and Sharaf, 1961 ) . However, recent history dirts, affecting corporations such as Enron in the US, HIH Insurance in Australia have cast uncertainty over the independency of hearers and overall value of scrutinizing.
These legislative intercessions have occurred despite a limited and assorted empirical grounds of these proposed menaces to auditor independency. Furthermore, some basic inquiries underlying this argument remain unsolved. For illustration, “What factors influence a company ‘s determination to buy NAS from its incumbent hearer? ’10
The proviso of NAS is decreasing investors ‘ judgements in audit quality and independency hearer but non their hearer cognition and fiscal statement dependability judgement. This assignment have consider two countries of literature which associating the theories and theoretical account of hearer independency. It besides relevancy on NAS found in current professional, regulative models, reviewed and summarized original theoretical and empirical surveies.
The Big Five audit houses ( Ernst & A ; Young, Arthur Anderson, Deloitte & A ; Touche, PricewaterhouseCoppers and KPMG ) courser higher audit fees for initial battle. It has rediction that where audit fees are disclosed publically. The audit houses try to take down their audit fees and seek to supply more moneymaking non audit services for the client. It is no existent loss of audit independency despite the loss of sensed independency of the Big 5 houses.
Today market audit house provide the proviso of NAS for their audit clients are popular and uninterrupted argument over hearer independency. NAS may include confer withing service such as systems design, compliance-related service, revenue enhancement, book-keeping ; design and execution of fiscal systems ; actuarial service ; internal audit outsourcing service ; direction maps or human resources ; trader and investing adviser.
The emerged from the Enron prostration has been the extent to which audit houses are supplying NAS to their audit clients. The fees generated by NAS have been lifting more quickly than audit fees. This has led to widespread beliefs that proviso of NAS can do the hearers to compromise their independency. There are two chief concerns which hearers may non stand up to direction because they wish to retain the extra income from NAS which is in direction ‘s gift. Second proviso of service may take the hearer to indentify excessively closely with direction and lose incredulity.
The remain contain are organized as follows:
? Contain background and literature reappraisal
? Develops the hypotheses and research inquiries,
? Contains the decisions.
2. BACKGROUND AND LITERATURE REVIEW
Auditor must continue independency in mental attitude for all affair associating to the assignment which stated by Generally Accepted Auditing Standards ( GAAS ) . Independence hearers furnish critical confidence that the fiscal statement have been examined by “an aim, impartial and skilled professional” ( SEC 2000, p.2 ) 10. It looks as hazards continue instead than an absolute and judgement about the earnestness of the menace to independence which balance against the effectivity of the precautions available.
Independence maintained through external restraints ( e.g, statute law and ordinance ) and profession itself for maintain the independency to continue its market value ( Kinney 1999 ) 3. It appears unsure of hearer ability to accept client force per unit area and stressing the consequence of the economic involvement. Its calls that confer withing services as “the tail that wags the dog” in the accounting industry ( Investment New Article, Nov 20, 2000 ) 10.
The SEC denote the new regulation that the hearer independency required to disclosure audit fee in their proxy statement, while entire fees which billed for services rendered by the principal comptroller ( the external audit house ) to divide into three classs as information engineering services, audit services, and all other services. It about all audit house purchases non audit services for their audit client.
Even though the large 5 scrutinizing house continue to prolong their independency which non impaired by NAS, recently jobs at Enron, WorldCom and other public house brought accounting and scrutinizing concerns to the attending of Congress and the populace. Newly passed statute law prohibits NAS, including fiscal information services and internal auditing services ( Sarbanes-Oxley Act 2002 ) 10.
Non audit services ( NAS ) are defined as all services provided by an hearer non considered as an audit. The Sarbanes Oxley Act ( SOX ) cut down the figure of non audit services that an hearer are required pre-approval by the audit commission of such drawn-out battle ( Rouse, 2005 ) .
Most banned services on confer withing or consultative services might make struggle of involvements for independent hearers ( Banham, 2003 ) . The banned NAS include:
1. Book-keeping or other services
– the hearer considered non independent when provides book-keeping services or other service related to the accounting records and fiscal statement for audit client. It involves an built-in struggle of involvement, hearer should look into accounting records or fiscal statements prepared appropriate.
2. Internal audit outsourcing services
– under by and large accepted auditing criterions, hearer determine the effectivity of internal control system over fiscal coverage, to make another illustration of struggle of involvement. For illustration, Arthur Anderson provided internal control map for Enron, before it was banned by 2000 SEC regulation, it was blamed for non bettering Enron ‘s uneffective control system.
3. Expert services unrelated to scrutinize
– supplying an adept sentiment and other service for audit client to recommending an audit client ‘ involvements in judicial proceeding, regulative, administrative proceeding and probe.
4. Design and execution of accounting systems
– its create built-in struggle of involvement, as an hearer required to find the effectivity of design and execution accounting system. Many large accounting houses was vastly popular supply a consulting services by put ining a computerized accounting system for client
5. Management maps moving
– temporarily or for good act as manager, officer, employee of an audit client in executing any determination devising, supervisory or ongoing monitoring map for audit client.
These services can supply by the incumbent audit house or external audit house. This proviso NAS lead to a deficiency of existent independency and hence lead to scrutinize failure.
3. HYPOTHESES AND RESEARCH
One of the major public concerns which emerged from the Enron prostration has been the extent to which audit houses are supplying non audit services ( NAS ) to their audit clients.
In 1997, Enron engaged Arthur Andersen as its External Auditor. Subsequently, Enron besides appointed Arthur Anderson as adviser. Enron paid Andersen $ 52 million in 2000 in both auditing and consulting services including development of computerized fiscal system for carry oning Enron ‘s internal audit, but bulk for confer withing services. There have been many knock about the possible struggle of involvement faced by audit houses who received big consultancy fees from their audit client ( e.g. Fiscal clip 2001a ) . It ‘s expressed how hearer with a statutory duty to company stockholders can manage a commercial relationship with the company ‘s direction and stay impartial ( e.g. fiscal Times, 2001b ) .
Andersen leaders react by forcing spouses to go salesman, it ‘s to upsetting the delicate reconciliation act of any hearer must execute between the clients and looking out for the public investor. Peopless have forgotten their important duty non merely to clients but besides to investor, creditors and the populace, etc.
These issues by assailing the “specific symptoms of the audit dislocation that occurred in the Enron Case” ( Gavious, 2007, pg458 ) , Arthur Anderson whose Enron client found to hold encouraged clients to utilize accounting techniques to misdirect and lead on the market ( Gavious,2007 ) . Enron select to utilize a method of just value accounting that misdirecting, exaggerated net incomes 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 finally led to the administration ‘s prostration ( Benston, 2006 ) . Due to IT and other frauds which investors lost assurance in market ( Crasewell, 1999 ) .
Its beliefs that proviso of NAS cause the hearers to compromise their independency. Andersen has been badly criticised for important economic and its independency has been questioned form two point of position – important economic dependance on Enron due to the party planing accounting and revenue enhancement constructions, and therefore it could non show an nonsubjective position on Enron ‘s consequences.
The two chief concerns are hearer may non stand up to direction because they wish to retain the extra income from NAS which is in direction gift, and second the proviso of a scope of services to direction may take the hearer to place excessively closely with direction and lose incredulity. Therefore, hearer independency is cardinal to public assurance in the audit procedure and dependability of auditor study.
However, the job facing by scrutinizing profession is non a deficiency of existent independency and objectiveness instead it is the deficiency of assurance in fiscal statements. Public assurance in a company ‘s fiscal statements will merely be achieved which companies staying wholly separate to their audit houses ( Ronen and Cherny,2002 ) . Thereby increasing the hearer ‘s sensed independency.
While Chartered battle of KPMG as its external hearer to execute non audit services which direction must see the existent, perceived and possible impact upon the independency of external audit prior to prosecuting external audit to set about any non audit services.
Chartered have established the Audit Committee of the Supervisory Board ( Audit Committee. ) to inadvertence of Company ‘s fiscal place. It ‘s responsible to oversing the operation of the internal hazard direction and control system, codifications of behavior, conformity with recommendation and observation of internal and external hearer.
In contrast, audit commission of Chartered have to see whether the proviso of such non audit services is compatible with keeping the external hearers ‘ independency, by obtaining confidence and verification that the extra services provided by external hearer are non in struggle with the audit procedure.
The audit commission has authorization in independent audit are to be-approved with information sufficient to enable Audit Committee to cognize as follows:
– the exactly what services it is being asked to pre-approved,
– know that any non audit service to be performed is a allowable non audit service
– made a well-reasoned appraisal of the impact of the proposed service on the hearer independency.
The external hearers are prohibited from supplying specified non audit service contemporaneously with supplying audit services to Chartered Semiconductor Manufacturing, including: –
– clerking or services related to accounting records or fiscal statements
– fiscal information system design and execution
– internal audit outsourcing services
– legal services an adept service unrelated to the audit
Audit commission has clarified and added farther forbidden activities for the external hearer. By focal point of the importance of Audit Committee in control and oversee the activities of the external hearers. It shows the Audit Committee has programs to beef up the independency comptrollers are truly independency and give a greater credibleness to audits.
In this research, Enron should hold formed an audit commission to oversight the company and prevent any fraud which prostration to bankruptcy which compare with Chartered, although the audit house provide not audit services, but they have a stronger and capableness audit commission to oversight the company fiscal place.
In the argument on hearer independency, the first affair that is normally raised is the proviso of non audit services to scrutinize client.
To be able to execute their undertaking of supplying independency and nonsubjective confidence to stockholders, hearer must move independently. It is argued that by supplying non-audit services to the audit client, the hearer ‘s independency and objectiveness is impaired.
In term of codifications of moralss all over the universe, it is non merely necessary for hearers to be independency, but there is besides a demand for hearers to be seen to be independent, and even a perceptual experience of a struggle can compromise his or her place. It behooves the hearer hence ne’er to acquire into such a state of affairs.
In this research, there is small empirical grounds that proves that the proviso of non audit services really impairs independency, but one must profess that it is hard to turn out. Recent corporate failures once more brought this issue really much under the limelight. As a profession, we should non undervalue the public feeling and the strong position held by authoritiess on this issue.
The regulation of basically change the manner scrutinizing profession does its concern as followers:
? Fundamental displacement in modulating accounting industry – from the chiefly self-regulated environment to public ordinance attack.
? A new set of independency regulations and ordinances affects the accounting profession straight in executing audit battle.
? A new independent public oversight board now has the direct authorization to patrol audit procedure, scrutinizing criterions, and disciplinary step on hearers, including
o registering public accounting houses that issue audit study for publically ( trade companies ) ,
O set uping auditing, quality control, moralss, independency, and other criterions associating to the readying of audit studies
o operate reviews of registered public accounting houses
o operate probes and disciplinary proceeding and enforcing appropriate countenances on audit houses and hearers.
An independent inadvertence board ( IOB ) set up by Andersen in the US, after the Enron jobs emerged but before the house collapsed, recommended that some confer withing services provided by the house should be separated into partnerships managed independently organize audit spouses and without fiscal independency to scrutinize clients. Recommendation was strengthen of internal quality control over scrutinizing thought out the house.
Beside this it ‘s create independent regulative to oversight bureau in accounting industry. Present no genuinely independent bureau with the authorization, unethical behavior watches the watchdogs, power, enforce punishments against illegal. While the Public Oversight Board was a nominally independent private organic structure which set a criterions for the industry ‘s self-regulatory strategies, it was ne’er genuinely independent.11 The determination comes from the America Institute of Certified Public Accountants.
At the point of position, the grounds show there is no correlativity between degrees of non-audit fee and audit failure, it include such as precautions and regulations separation of non-audit services seems largely increase the cost and cut down the quality of the audit. This suggestion should non be pursued. Assuming none influence economic dependance in consequences of the auditor/client relationship and equal precautions can be implemented. We believe that all companies should find whether they use hearers for non audit services, in audience with the profession ‘s guidelines.
5 II. Reference
1. Ashbaugh, H. , R.LaFond, and B.Mayhew.2003. Do non-audit services via media hearer independency? Further grounds. The Accounting Review 78: 611-639.1
2. Arthur Andersen and Enro: Positive Influence on the Accounting Industry 2
Available at: hypertext transfer protocol: //faculty.mckendree.edu/scholars/2004/stinson.htm
3. Audited account and Non Audit Services Pre-Approval Policy 3
Available at: hypertext transfer protocol: //www.merrimacind.com/investors/auditpolicy.html
4. “Audit” vs. “non-audit” revenue enhancement services under Sarbanes-Oxley 4
Available at: hypertext transfer protocol: //allbusiness.com/accounting-reporting/auditing/749044-1.htm
5. Auditor Independence-General ( for APB Ethical Standards 5
6. Enron profile 6
Available at: hypertext transfer protocol: //en.wikipedia.org/wiki/Enron
7. SEC ( United States Securities and Exchange Commission ) ( 2000 ) “ Concluding Rule: Revision of the Commission ‘s Auditor Independence Requirements” . 7
Available at: hypertext transfer protocol: //www.sec.gov/rules/final/33-7919 htm
8. Simunic, D.A. ( 1984 ) “Auditing, confer withing and hearer independence” , Journal of Accounting Research, 22 ( Autumn ) :679-702 8
9. The US Sarbanes-Oxley Act of 2002: Reforming corporate administration and revelation 9
Available at: hypertext transfer protocol: //dsp-psd.tpsgc.gc.ca/Collection-R/LoPBdP/BP/prb0242-e.htm
10. Menaces To Auditor Independence: The Impact of Non Audit Services Tenure and Alumni Affiliation 10
Available at: hypertext transfer protocol: //aaahq.org/audit/midyear/07midyear/papers/Ye_ThreatsToAuditorIndependece.pdf
11. Why we need to make an independency regulative inadvertence bureau for accounting industry 11
Available at: hypertext transfer protocol: //enronwatchdog.org/topreforms/topreforms3.html