Study backs firms providing audit and non-audit services

Accounting firms that provide both audit and non-audit services offer positive benefits in the market, according to a new study from a trio of international accounting organizations that aims to counter regulatory calls abroad to make far-reaching changes in the way Big Four firms do business.

The report, Audit Quality in a Multidisciplinary Firm, from the Chartered Accountants Australia and New Zealand (CA ANZ), the Association of Chartered Certified Accountants (ACCA) and the International Federation of Accountants (IFAC), argues that “the presence of multidisciplinary firms in a large and evolving corporate reporting system fills a valuable market need.”

The study contends that the current rules “mitigate risks associated with audit firms providing non-audit services to some audit clients.”

Courtesy of IFAC

The study posits that high-quality audits need “a diverse skill base” and “the multidisciplinary model is one of the best mechanisms to develop the skills, expertise and consistency needed for quality audits.”

Regulators in the United Kingdom and the European Union have been considering measures to separate the audit and non-audit functions at firms, particularly the Big Four, in response to a series of recent high-profile accounting scandals. The study acknowledges that the provision of non-audit services pose threats to auditor independence.

“There continues to be concern that independence is compromised in doing so, in spite of strict rules that prohibit or restrict firms from providing such services to audit clients,” the study noted. “Services that are permitted quite often are complementary to the audit, and threats to independence can be effectively mitigated. However, demonstrating to the public that perceived conflicts of interest are being appropriately managed is challenging. ... As this issue continues to be considered, it is important to remember that evidence cited in this paper calls into question the need for sweeping regulatory changes that could have unintended consequences on audit quality. ... The vast majority of non-audit fees actually come from clients for whom firms do not provide audit services.”

The study may play a role in debates over the merits of whether audit firms need to reduce their reliance on consulting work.

“Questions about audit quality, independence and competition are always worth asking,” said IFAC CEO Kevin Dancey in a statement. “But no one should rush to conclusions. The business case for the multidisciplinary model is strong and there is significant evidence in support of the model. Let’s work with the facts as we continue to best serve the public interest.”