Tuesday, September 29, 2015

Audit Firms: Non-Audit Services

Growth in consultancy among the Big Four is outpacing their traditional tax and audit services, while the firms are also outperforming management consultants. Big Four firms have been steadily rebuilding their consultancy arms through a series of acquisitions in order to compensate for stagnating growth for traditional audit work. The type of non-audit services that audit firms provide ranges widely from audit firm to audit firm. They may include professional advice on transactions (for example, a merger, acquisition or restructuring) as well as tax and broader business advisory services (including performance improvement and information technology). Non-audit services may also include advisory work to assist companies to comply with laws and regulations.

The strict regulations imposed by Sarbanes Oxley Act introduced in USA led to a rash of sales of consultancy divisions by the auditing firms. IBM for instance bought PwC's consulting arm, E&Y Consulting had already sold to Cap Gemini and KPMG did an IPO of KPMG Consulting, which then became BearingPoint. But by the time the Big Four's non-compete clauses expired, typically in three to five years, consulting was back as a high-focus area at the accounting firms.

Soon after the Enron controversy died, the accounting firms realized that regulations could be taken care of if they built a practice that largely consisted of non-audit clients where conflict situations didn't arise; and where there was overlap, they could always avoid selling certain services. And that's what they did. Deloitte recorded a revenue figure of US$ 34.2 billion (2014) with growth for consulting at 10.3 percent. EY advisory grew by 14.4% as compared to assurance growth of 4.5% in 2014. Out of PWC total revenue of US$ 34 billion in 2014 18.8 billion was generated by Tax and Advisory Services. Kpmg total advisory revenues for the year 2014 were up by 10.4% to US$9.09 billion, up from 6.5% in FY13.

That's indeed a high turnaround from 2002 when following Enron's bankruptcy and the dissolution of Arthur Andersen, KPMG and PwC dumped their consulting arms; Ernst & Young had already done so in 2000. The sell-off was a reaction to a toughened up Sarbanes-Oxley Act that restricted the scope of non-audit services that could be offered to audit clients to limit any conflict of interest.

Additional Thoughts
In many countries the codes of corporate governance forbids auditors to provide non-audit services to audit clients if that would present a threat to independence for which no adequate safeguards are available. It is the responsibility of the audit committee being the representative of shareholders to oversee the relationship between the auditor and the company. The audit committee must scrutinize the provision of non-audit services by the audit firms and must have to make sure that the independence and objectivity of the audit firm is not compromised.  

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