The limitation aims to provide investors with financial information from a publicly-listed firm that has reliability and integrity which has undergone scrutiny from auditors. Thus, auditor’s independence from the audited firms are crucial for investors to place their money on such firms and prevent adverse speculations (like collusion or bribery) that can discourage/ delay investments. Such investments have micro- as well as macro-benefits in the economy. Almost half of American households have money in the stock market. Considering this and the reliance of investors to technological advances like Internet, intensifies the need for impartial auditors and strict assurance that the only basis of engaging into risks (FS) is really “impartial” and objective.
As a result, providing non-audit services by auditing firms to their respective initially auditing clients was a long concern to auditor’s objectivity. There could be manipulation and insider’s under-the-table agreement due to dualism of services that may hinder the interests of investors with regards to reliable FS. Because of this, US-SEC firstly considered historical relevance of non-audit regulation as far as 1970s when Congress was unease on independence issue. This is followed by 1994 and 1996 reports from AICPA, US-SEC Staff and GAO relating to same apprehension due to increasing number of services offered by auditing firms. In general, US-SEC had released and adapted non-absolute ban on non-audit services of auditing firms.
The US-SEC took into consideration in analysis before setting the policies the fact that there are two divergent/ opposing issues in the “statement that non-audit services create economic incentives that may inappropriately affect audit.” One side said that when Congress allowed direct transaction and payment between auditing firms and clients, the body also accepted economic benefits that may arise therein. In contrast, the other side characterized non-audit services as the platform for “self-serving bias” by auditors and will affect behavior away from independence. In addition, one reputable public policy adviser, Earnscliffe, was also acknowledged by the office in its report that increased non-audit services adversely affected investor’s confidence on FS. The office also refused to accept the argument that there should be no restriction to non-audit services due to absence of evidences that prove its departure to audit independence (theory of prophylactic rules).
In general, the restriction of non-audit services applies in condition when: (1) it creates conflicting interest, (2) places accountant in the position of auditing its own work, (3) results in accountant acting as management or employee and (4) places accountant’s advocacy on the client. These restrictions, however, are considered relative to the stance of either the accountant of the audit firm or client.
Major Characteristics of the Non-Audit Limitation (US Version)
Bookkeeping is one non-audit service that is prohibited by the office. The function is considered a managerial function, thus, passing directly condition number 3. However, the prohibition is relaxed at instances where bookkeeping is done to a foreign subsidiary or local division of the client. With this as initial consideration, there is a need to prove other things such as absence of competent employee of the client and impracticality for the client to seek the service other than the audit-accountant.
The assessment, design and implementation of financial information systems of the client should also be limited to its employees and management. This prohibition, however, views the audit quality theory and is willing to limit the restraint to issues wherein the client is performing at the advisee level not the decision-maker on matters pertaining to information systems. Since it is beneficial for audit firms and clients to have the same hardware and software even local area network connections, the office is less restrictive to this respect as long as there is independence to final decision-making.
Appraisal and valuation services are prohibited since this will trigger number 2 condition wherein the auditor evaluates its own valuation criteria despite of the fact the inadequacy of involvement of accountant in the transaction. However, there are several exceptions like when valuation is done to aid clients to forecast future cash flows. This is enforced by the general exception that such specific service is done with fairness opinion (adequacy of consideration) and the results would be a minimal part of clients’ FS and such part of FS will not be reviewed by the same accountant.
Actuarial services that were previously and generally considered as prohibited with regards to insurance firms was relaxed and specified towards such firms’ basic operation and management particularly the determination of company policy reserves and related accounts. This is supported by crucial instances to quote the service a departure to audit independence such as the primary role of management or third party about actuarial strategies and the non-continuous nature of such service.
Internal audit services are deemed restrictive when the client has at least 0 million of assets and outsource more than 40% of internal audit to its audit accountants. The exception is given to small businesses with less than 0 million of assets despite outsourcing internal audit in excess of 40%. The client, however, should have competent internal manager who is responsible in final execution of financial findings although most are outsourced.
The Australian Landscape
In the contrary, Australian differs from the US approach since its policies are merely guidance not legal restriction
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