Question

Do you believe a conflict of interest exists when audit firms earn about as much money from non-audit services as audit services, given they are expected to make independent judgments on the financial transactions and financial reporting of their audit clients? There is no case study for this question that I know of as I did not see one listed.

Answer 1

Yes, a conflict of interest exists when audit firms earn about as much money from non-audit services as audit services. This is because provision of both audit services and non-audit services often leads to a situation in which the audit company becomes too close to the company that they are auditing and so a familiarity threat creeps in when they are providing non-audit services. Secondly conflict of interest most often arises as objectivity of the audit firm is challenged because of their over-reliance on income from a single client (to whom both audit and non-audit services are provided).

When auditors provide non-audit services to audit clients then there is a tangible threat to independence for which no adequate safeguards are available. Professional judgement and objectivity of an audit engagement is often compromised when audit firms earn about as much money from non-audit services as audit services.

Conflict of interest will arise when the following type of non-audit services are provided by the auditors – making investment decisions on behalf of the clients, executing a transaction that involves buying or selling an audit client’s investments and when the auditor has custody of client’s assets.

Conflict of interest will not arise when the following type of non-audit services are provided by the auditors – recommendation with regards to allocation of funds based on clients risk tolerance, comparative analysis of the audit client’s investments to third-party benchmarks and reviewing the client’s portfolio with regards to how it is being managed by the investment managers.