Audit Independence 'a Function of Auditor Size,' say Researchers

Academics have found that larger audit firms are less likely to compromise their independence than smaller ones when providing non-audit services to their clients.

And when the provision of non-audit services - and consequently the fee - is relatively high, these smaller firms find it hard to resist aggressive accounting by their clients.

The Lancaster University study into non-audit services, auditor independence and earnings management found that the latter's proximity to analyst's forecasts varies according to the size of the fee for Big Five and non-Big Five firms.

Pelham Gore, Peter Pope and Ashni Singh carried out the research following the recent furore over the issue. In early 2000, the Securities and Exchange Commission found over 8,000 violations of auditor independence at PricewaterhouseCoopers. Guidelines limiting auditor independence were subsequently issued.

On the surface, auditors can still provide non-audit services to their clients. But the findings in this report suggest a "direct causal link" between non-audit services, audit reporting and financial reporting quality.

The study looked at earnings management activity in a sample of 4,779 UK listed non-financial companies between 1992 and 1998.

You will need Adobe Acrobat Reader to view the full report. Be patient as the report takes some time to load.

You may like these other stories...

The Public Company Accounting Oversight Board (PCAOB) on Tuesday adopted a new auditing standard and amendments in three areas of the audit that could pose an increased risk of material misstatement in company financial...
Read more from Larry Perry here and in the Today’s World of Audits archive.In my last article, I presented an overview of one of the first steps in the preplanning phase of an audit engagement: reviewing prior year...
Read more from Larry Perry here and in the Today’s World of Audits archive.AU-C Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks (SPFs),...

Already a member? log in here.

Upcoming CPE Webinars

Sep 18
In this course, Amber Setter will shine the light on different types of leadership behavior- an integral part of everyone's career.
Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.