Non-assurance services to Assurance clients


Accountancy and audit firms in addition to audits offer a range of other services to companies. While the income from non-audit services often exceeds that from audit services, auditors allegedly in a controversial practice known as ‘low-balling' offer to supply audits at low cost in order to secure their jobs. Even without low-balling, providing non-audit services to management by auditors may be seen conflicting with audit independence. (Cosserat,0000)

In May 2009 the Treasury Select Committee issued a report in which it asked for revisiting the suitability of the provision of non-audit services by auditors to the entities that they audit, saying: "We strongly believe that investor confidence, and trust in audit would be enhanced by a prohibition on audit firms conducting non-audit work for the same company, and recommend that the Financial Reporting Council consult on this proposal at the earliest opportunity". (FRC, 2009)

As an example KPMG's announcement of providing an ‘extended assurance' service to Rentokil in 2009, covering both external and internal audit service initiated a new debate on the issue of auditors' independence in relation to the provision of assurance services. The KPMG's promise to considerably decrease audit costs caused concerns that it could be skirting ethical guidelines. (Accountancyage, 2009)

As a result in November 2009 the Financial Reporting Council advised companies to use caution when considering this kind of arrangement as it investigates whether they are in line with ethical standards. In a statement Paul Boyle, chief executive of the FRC, stated that ‘companies should be cautious not least because it could prove to be inconvenient and/or costly to change such arrangements should [the FRC change] the Ethical Standards'. (Accountanyage, 2009)

An explanation and critical discussion of the meaning and significance of independence in relation to the provision of assurance services

The two forms of independence, which auditors must maintain according to IFAC's Code of Ethics, are ‘independence in appearance' and ‘independence of mind'. The UK's Auditing Practices Board (ABP) instead has used two separate terms ‘objectivity' for ‘independence of mind' and ‘independence' for ‘independence in appearance', which explain:

* Auditors are objective and provide impartial opinion unaffected by bias, prejudice, compromise and conflicts of interest.

* Auditors are also independent, this requires them to be free from situations and relationships that would make it probable that a reasonable and informed third party conclude that the auditors' objectivity either is impaired or could be impaired. (Porter,2009)

Although these requirements might seem obvious, but in practice the unexpected corporate failures like WorldCom and Enron demonstrate such independence may be difficult to achieve. In those cases, lack of auditors' independence was highlighted as a key contributing factor. Due to importance of the audit and investors' confidence in the integrity of auditing the International Federation of Accountant (IFAC), the Auditing Practices Board (APB) in UK and US's the Securities and Exchange Commissions (SEC) have set standards to strengthen auditors' independence. Given the story of Enron's collapse and the amount of non-audit services, the SEC has focused on the provision of non-audit services to audit clients as the key threat to auditors' independence. On the other hand, the APB has identified six threats to auditors' objectivity and independence that may arise through the provision of non-audit services: Self-interest threat, self-review threat, management threat, advocacy threat, familiarity (or trust) threat, and intimidation threat. Audit standards warn against two threats of self-review and self-review in particular when an auditor undertakes non-audit work.(APB ES5,para16,2008) These two threats are explained in the following terms in APB's Ethical Standard(ES)1 :

* Self-review threat:

A self-review threat arises when the results of a non-audit service performed by the auditor or by others within the audit firm are reflected in the amounts included or disclosed in the financial statements .In the course of the audit, the auditor may need to re-evaluate the work performed in the non-audit service. As, by virtue of providing the non-audit service, the audit firm is associated with aspects of the preparation of the financial statements, it may be (or may be perceived to be) unable to take an impartial view of relevant aspects of those financial statements.

* self-interest threat :

A self-interest threat arises when the auditor has financial or other interests, which might cause it to be reluctant to take actions that would be adverse to the interests of the audit firm or any individual in a position to influence the conduct or outcome of the audit. (APB ES1, 2008)

Similarly IFAC in its Code of ethics for professional accountants (2009) and the European Union Commission's A Set of Fundamental Principles (2002) identify that different types of threats consisting of self-review, self-interest, familiarity, advocacy and intimidation can affect auditors' independence.(Porter,2009)

A description of the nature of other services provided and critical discussion of professional code requirements.(Eg. Those of IFAC, APB)

According to APB (2009), there are varieties of ways in which non-audit services can be categorised due to different purposes in different countries. Subject to compliance with the Ethical Standards, the APB has classified these services and its examples as below:

· Activities, which are arising directly from an audit of a company's financial statements. examples including :

o Advice on compliance with accounting standards

o Advice on internal controls arising from weaknesses identified in the audit

o Particular assignments that audit committees ask auditors to undertake directly connected with an audit

o Advising on adjustments required to be made to financial statements as a result of matters arising from an audit

· Services that are required to be provided by the auditor by law / regulations. Examples including :

o Reporting on internal controls for US registrants (Sarbanes/Oxley)

o Reporting on regulatory returns

o Reports relating to government grants

o Reporting on half yearly statements under the Disclosure and Transparency requirements

· Services provided by auditors because of their familiarity with the client and, as a consequence, their ability to perform them in a timely and cost effective manner. examples including :

o Reports for sponsors and companies issued pursuant to the requirements of capital markets regulators

o Reporting on prospectuses relating to either equity or debt issues

Furthermore, under APB's Ethical Standards for Auditors, services listed below can only be supplied under certain conditions to avoid major threats to auditor objectivity:

* Services provided because of the pool of accounting and related financial skills available to accountancy firms. examples including:

o Internal audit

This service can be provided if auditor is satisfied that there is informed management and appropriate safeguards are applied to reduce the self-review threat to a satisfactory level.

Auditor shall not offer internal audit services where it is reasonably predictable that:

A. for the purposes of the audit of the financial statements, the auditor would place significant reliance on the internal audit work performed by the audit firm; or

B. For the purposes of the internal audit services, the audit firm would undertake part of the role of management. (APB ES5,2008)

o Tax planning advice

o Advice and assistance with corporate restructuring projects

o Transaction services

* Services provided because of the pool of consulting and general business skills available to accountancy firms

o Design or Implementation of IT systems

This service can be provided, if there is informed management and appropriate safeguards are applied to reduce the self-review threat to an acceptable level. The audit firm shall not undertake this service where:

A. the systems concerned would be important to any significant part of the accounting system or to the production of the financial statements and the auditor would place significant reliance upon them as part of the audit of the financial statements; or

B. For the purposes of the information technology services, the audit firm would undertake part of the role of management.(APB ES5,2008)

o Corporate Finance advice and transaction management

o Human resource services

o Legal services

o Actuarial services

o Management consultancy services

An explanation and analysis of current and emerging developments in respect of the provision of other services to assurance client

In July 2009, The International Ethics Standards Board for Accountants has published a revised Code of Ethics for Professional Accountants consists of the following changes in order to considerably strengthen auditors' independence requirements:

* Extending the independence requirements for audits of listed entities to all public interest entities;

* Requiring a cooling off period before certain members of the firm can join public interest audit clients in certain specified positions;

* Extending partner rotation requirements to all key audit partners;

* Strengthening some of the provisions related to the provision of non-assurance services to audit clients;

* Requiring a pre- or post-issuance review if total fees from a public interest audit client exceed 15% of the total fees of the firm for two consecutive years; and

* Prohibiting key audit partners from being evaluated on or compensated for selling non-assurance services to their audit clients.

This code that will come into effect from 1 January 2011 keeps the principles-based approach in addition to detailed requirements which makes it suitably flexible to tackle different obstacles encountered by professional auditors and accountants. (IFAC,2009)

In addition, APB in response to the Treasury Select Committee's report that was mentioned in the beginning of this essay issued a Consultation Paper in October 2009.This paper focused mainly on the provision of non-audit services to listed companies, provides relevant background information, and invites views on this issue.

Justified conclusions, including your opinion/possible solutions and future developments

100 !

In my view !

1When there's this much concern, about an issue, the regulator should examine it, if only to provide the

industry with clear, unambiguous guidance. In the end KPMG might be left with egg on its face, or it could

emerge as an innovator.And in this scenario it would be of no surprise to see its rivals follow their lead.(accountancyage)


1. Modern auditing ,Cosserat 2----

2. Principles of external auditing , Brenda porter , 3rd ed ,

3. FRC 06 October 2009

4. Accountancy age 2009


6. IFAC -Code of Ethics for Professional Accountants (revised July 2009)

7. APB's Ethical Standard(ES)1




Professional oversight board

Financial reporting council

Accounting practice board

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