Speaking before the Securities and Exchange Commission on Wednesday, Professor Rick Antle of the Yale School of Management indicated it is usually unreasonable to assume an auditing firm than performs non-audit services is going to compromise its audit.
Antle has studied the issue of auditor independence at length and is co-author of the white paper, "An Economic Analysis of Auditor Independence for a Multi-client, Multi-service Public Accounting Firm" submitted to the Independence Standards Board (ISB) on behalf of the American Institute of Certified Public Accountants (AICPA).
In an interview after the SEC hearing, Professor Antle elaborated on his testimony. “If I’m somebody’s auditor and, as part of my audit, I am to rely on an actuarial report outsourced by the client company, I look over the report and make a determination as to the accuracy of the computations. What’s the difference between that and examining a report prepared by actuaries at my own firm? The argument is that the audit is somehow going to compromised because my firm performs the audit and also does the actuarial business.”
Professor Antle noted that company owners rely heavily on their accountants for advice in many matters. “Who would they turn to if they can’t consult with their accountants when they are making decisions that affect any financial aspect of the firm? Business owners trust their accountants and rely on these financial professionals to help them make everyday decisions.”
Antle added, “Suppose you’re an auditor and the client calls and says, ‘We’re thinking about merging with another firm. What effect will this have on us?’ At this point are you an auditor or a consultant? It’s not clear. Is the idea of an audit that we wait until everything is all done at the end of the year, and then we come in and check to see that everything is right? Or is it more one of a continual involvement, providing our clients with the benefit of our knowledge and expertise?”
Although Antle noted the idyllic scenario of auditors being completely independent, he pointed out that, “If you really want auditors to be totally independent, they can’t be paid by their clients. This is pretty much irrelevant because that’s not the way the system works. We don’t demand that, we don’t even think that’s a good idea. What we do think is that, ideally, auditors and management work together to try to issue a good set of financial reports. It is a fact that they don’t have the same interests, but a huge proportion of managers are truly interested in disclosing the right things. They’re trying to do their jobs and they have an interest in good disclosure themselves.
“Financial statements are a product work performed by people inside the company and others outside the company. While it is true that for the outside people to lend any credibility or assurance to the reports, they can’t also be the inside people, it is unreasonable to assume that the outside people can’t provide their expertise to assist the company in making management decisions.”
During the hearings, Antle referred to the strong incentives accountants have to remain independent while performing consulting services. These incentives include reputation, competition and market pressures, regulation and professional discipline, and civil litigation and criminal laws. In general Antle feels in most cases auditors are not going to sacrifice their firm and its reputation by providing tainted audits to cover a practice of conspiratorial consulting.
He recommended to the Commission a thorough, systematic attempt to estimate the magnitude of the economies of scope before serious restrictions on the scope of services are imposed, and a balance of the value of the economies of scope against the potential financial reporting costs.