Question

Suggest, giving brief reasons, whether it would be acceptable governance practice for the following types of non-audit work to be awarded by a listed company to its external auditors:

i) Management consultancy services

ii) Book-keeping services

iii) Speaking as an expert witness for the company in a major legal case against a shareholder

iv) Tax advice

Answer 1

The guiding principle should be that the external auditors should not be engaged to do non-auditwork if this would threaten the independence of the audit firm in conducting the audit.

(i) Subject to the overriding principle of ensuring independence of the audit firm, it is acceptable to give management consultancy work to the auditors. The auditors are not required to check work done by the firms own staff, they are not required to make management decisions for the ‟company and they would not act in a role of advocate for the company.

(ii) The audit firm should not be given book-keeping work because this would put the auditors in a position of having to check work done by the audit firms own staff.

(iii) The audit firm should not act as an expert witness for the company because it would be acting as an advocate for the company, and this could threaten its independence.

(iv) It is generally accepted that in most cases audit firms should be allowed to give tax advice toclient companies, for the same reasons as in (i).

Although the question dealt with a central theme in corporate governance, the quality of answers varied. Audit committees cannot make decisions about the allocation of non-audit work to the audit firm unless they are advised what is, and what is not, permissible. A lot of candidates did not appear fully aware of the rulesand what happens in practice.