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KPMG: How many Firms?

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    Professional Standards do not allow a company’s auditors to also provide tax services and retain independence. There have been myriad restrictions placed on professional service companies by the SEC and PCAOB. These companies are restricted on the nonaudit services that the company’s auditors can provide clients. If a service company provides auditing services for a particular company, they are restricted in terms of other services that they can provide. These restrictions were not always in place, but were created in order to increase and maintain the independence of auditors and the auditor’s clients. This independence issue for example can arise from situations where a company provides auditing and tax services to the same client. The auditors would essentially be auditing some of their own work, or may compromise their professional judgment and due care if the tax services provide more revenue, ultimately sacrificing their independence.

    Furthermore, according to rule 3523 “ if auditors or their affiliates provide tax services to public company managers in financial reporting oversight roles during the audit and professional engagement period, their independence is impaired”. (PCAOB, 2013) The rule generally prohibits an auditor from providing tax services to these persons during this period, to eliminate any perception that the auditor and the client’s management share a joint interest, which may lessen the ability of the auditor to conduct an unbiased audit. Regarding the restrictions placed specifically on tax services, the rules in the related professional standards include the prohibition of tax services that are based on judicial proceedings and tax services for key company executives, such as to an individual in a financial reporting oversight role. (Louwers, 2013). Thus, even though PCAOB and the SEC regulate these tax services allowed in order to maintain independence, all tax services are not necessarily prohibited.

    The provisions of Sarbanes-Oxley Act limited a public company’s choice of auditors in a profound way. This act was created in order to increase auditor’s independence in regards to their clients. Prior to this act, accounting firms were able to provide many other services along with their audit services to the same companies (including consulting services). Despite providing these overlapping services, they were technically independent according to the law and standards applied to them. Some major scandals, including Enron and WorldCom in the early 2000’s encouraged the law to change and restrictions to be put in place to lessen the risk of these scandals. The PCAOB was created to provide oversight on these companies and the auditing services provided, and the PCAOB make the rules to make sure that all of the accounting firms maintain independence. Public companies now have limited choices in terms of which firm they choose to audit their company and provide other professional services because they cannot have the same firm provide them with multiple services.

    There are various advantages and disadvantages of permitting auditors to provide nonaudit services (such as tax services) to their audit clients. One advantage would be that it makes it easier for the client to only have one firm working on their company and limiting the amount of companies that they have to provide information to. Furthermore, an extensive knowledge of the client will enable the auditor to offer their services to the client in context, which they already understand. The auditor won’t need to obtain a large amount of background knowledge and information before conducting their other work, which will save the auditor time and the client money and fees. Lastly, this would allow firms to choose from more firms in terms of their services. Limiting what services can be provided can be difficult for a company to change firms or make decisions about what service firms to choose.

    Disadvantages are that the auditor will not be considered independent in fact or appearance. The auditors will in most cases be auditing their own work, which creates a major conflict of interest. Many parts of these other services involve management functions, which will certainly be an independence issue. Moreover, the work that they provide may effectively involve or be seen as advocating for the client. Auditors may allow inappropriate accounting treatments due to their lack of independence because they have either become too close to the company (“familiarity threat”) or because their objectivity is challenged by an over reliance on another source of income.

    Having a smaller number of major international accounting firms may have an important impact on public companies. It is more burdensome to have to choose and change companies that provide services. For example, in the case they describe Intel Corps.’ Issue in 2005 because they wanted to change auditors but only had the Big 4 to choose from. Ernst and Young had audited their statements for over 30 years, and the other Big 4 firms provided other non-audit services to Intel. The decided to continue using Ernst and Young as their auditors solely because it was less complicated. According to Intel’s corporate secretary, they chose them “because there are only a limited number of large multinational audit firms that do the kind of work that we need, if we were to switch audit firms, all sorts of dominoes would fall”. Due to Sarbanes Oxley, the firms would have to maintain their independence, thus if a firm provided a non-audit service and Intel wanted to hire them for auditing, they would have to stop the non-audit service and Intel would have to choose a new firm for that service. This complicates things for public companies because they have limited options for the multitude of services that they desire.

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    KPMG: How many Firms?. (2017, Feb 01). Retrieved from https://graduateway.com/kpmg-how-many-firms/

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