How provision of nonaudit services affects auditors independence - Free Essay Example

Recent expansion of nonaudit services by public accounting firms has caused some to question whether auditors who provide nonaudit services to audit clients can remain independent of their clientsà ¢Ã¢â€š ¬Ã‚  Introduction The increasing level of frauds and scandals in the corporate sector have resulted in an upsurge in the regulations for audit firms whereby their independence is kept into question due to the non-audit services they offer to their audit clients (IOSCO, 2007). Many public accounting firms provide such services to their clients merely because of convenience, knowledge about the clients financial statements and saving extra time spent dealing with audit and non-audit services separately (Muir, 2014). However, financial statement users often perceive it as impairing the auditors independence (Al-Ajmi and Saudagaran, 2011). Different views exist about the impact of providing non-audit services to audit clients; they may have negative (Quick and Rasmussen, 2015), positive (Wang and Hay, 2013) or no effect on the auditors independence (Jenkins and Krawczyk, 2001). As such, this essay will explore whether the provision of nonaudit services affects auditors independence. Definition and Role of Non-audit Services Adeyemi and Olowookere (2012) regard non-audit services to be any services provided by an auditor other than their code audit function. These services may include bookkeeping (Jenkins and Krawczyk, 2001), management consultancy (ICAEW, 2015), tax advisory services (Pwc, 2014), human resource consultancy (ABP, 2004) and others. Jenkins and Krawczyk (2001) found that bookkeeping has a negative impact on auditors independence, while management consultancy and tax advisory services have a positive impact. The differences occur because of an expectation gap between the auditing professionals and financial statement users (Jenkins and Krawczyk, 2001). Looking at it from a marketing perspective, organisations providing additional value to their customers other than their core service are considered to be highly competitive and end up being more successful than their competitors (Hoffman, 2009). That is exactly what audit firms strive for when they offer additional services to their cli ents in anticipation of strengthening relationship with them (Ismail, Hasnah, Ibrahim and Isa, 2006). However, critics object on the income received from non-audit services because their impact on the objectivity of the auditor has long been considered as a potential threat for the auditing process and financial system as a whole (Adeyemi and Olowookere, 2012). Okaro and Okafor (2009) pointed out that an audit firm auditing their own work is not regarded to be independent and the objectivity of their work may be questioned at any point by financial statement users. To avoid any criticisms from their stakeholders, audit firms need to be particular about their audit quality, which is considered to be high if the stakeholders are assured to have no uncertainty and ambiguity in the financial statements prepared by the management (Krishan, Zhang and Sami, 2005). Negative Impact on Auditors Independence Threat to Audit Quality The work of an audit firm is to act as an investment guide, which helps in their clients valuation and predicting bankruptcy (Salehi, 2009a). Research suggests that there is a strong relationship between the credibility of the statements produced by an audit firm and the investment decision taken by the client (Salehi, 2009a). Therefore the economic development of the client is often dependent upon the credibility of the documents prepared by the audit firm, which depicts the financial standing of the client (Wahdan et al., 2005). Sori and Karbhari (2006) believe that the auditor independence may be affected by this economic bonding between the auditor and the client. In case of an increasing pressure from the client regarding consultancy in investment decisions, the auditor may unintentionally overlook the quality of the actual audit services. Gwilliam (2010) mentioned that a classic example of audit failure was that of Ernst Young while conducting the audit of a UK truck manu facturing company, ERF. In that case, the provision of non-audit services impaired the audit quality to such an extent that the firm had to undergo a couple of lawsuits. A part of the case constituted of the company accountants attempt to fabricate the VAT returns, so that the repayments from the Customs and Excise could be received. Moreover, the audit team did not work on the VAT separately; they relied upon the figures received from the VAT specialists. This compromise in the quality of audit services resulting from intrusion of additional services, negatively affected the independence of Ernst Young. Threat due to the Provision of Joint Services Another problem arises when the audit and non-audit services are provided in conjunction with each other, whereby the focus on the actual service may be lost (Sori and Karbhari, 2006). Swanger and Chewning (2001) recommended a solution to this issue, i.e. the personnel performing the audit and non-audit services should be separate. Regulatory authorities, however, believe that it would be difficult to track performance if this solution is implemented; hence audit firms should be banned from providing any additional services to their clients (Chadbourne and Parke, 2003). Additionally, the Securities and Exchange Commission adopted rules which limit the audit firms from providing any compensation to their clients in joint services (Chadbourne and Parke, 2003). Threat of Higher Non-audit Fee Research indicates that the auditor independence is adversely affected if the fee paid for non-audit services is higher when compared with that of audit services (Frankel, Johnson and Nelson, 2002). Due to the existence of this threat, the Securities and Exchange Commission devised laws which enforced the disclosure of all fees paid to auditors by their clients (Chadbourne and Parke, 2003). Chen, Elder and Liu (2005) found an unfavourable relationship between non-audit services and the degree of acceptance the client showed to the recommendations by the auditor. This imparts that highly extensive additional services result in lower possibility of acceptance from the client, due to the equally high fee attached to them (Reynolds, Deis and Francis, 2004). Therefore, it may turn out to be hazardous for the audit firms independence as it would then attempt to introduce even more extensive non-audit services, further complicating legal requirements for itself. Threat from Relationship with Management Perhaps the greatest detrimental effect which non-audit services have on auditors independence is related to the relationship between the auditor and client management and the way it affects audit approach (Gwilliam, Teng and Marnet, 2014). Despite its economic dependence on its clients, the audit firms independence is greatly strengthened by lower levels of competition to cater to its clients (Quick and Rasmussen, 2015). Positive Impact on Auditors Independence Strengthening Audit Quality Wang and Hay (2013) provided evidence for a positive relationship between provision of non-audit services and auditors independence, indicating that these additional services help the audit firms distinguish themselves from their competitors, whereby they portray their uniqueness in front of their clients. Some authors support this claim by saying that the auditors objectivity is strengthened by non-audit services because they help them form a better understanding of their clients (Jenkins and Krawczyk, 2001). Proponents of this view explain that the audit quality is indeed enhanced by the provision of non-audit services, because the auditors are then able to develop a better understanding of their clients industry, competitive position, strategies, business model and the risks they face (Ernst Young, 2013). Gwilliam, Teng and Marnet (2014) mentioned that because of economies of scope, the joint provision of audit and non-audit services has economic benefits for both the auditor a nd the client. It is mainly because of knowledge spillovers. Limiting the audit firms from providing non-audit services would result in economic inefficiency. Ernst Young (2013), for example, takes advantage of its non-audit services through knowledge spillovers; i.e. it uses the financial information gained from auditing its clients to provide advisory and consultancy services to the same clients related to their investment decisions, recruitment, strategic direction and other such internal matters. While there are concerns regarding clients paying higher fee when they opt for a joint provision of both types of services (Frankel, Johnson and Nelson, 2002), there is another school of thought which directs financial statement users to initially compare the frequency of usage of both audit and non-audit services before jumping to any such conclusions (Ezzamel, Gwilliam and Holland, 2002). This imparts that firms paying higher may be using more of non-audit services than actual audit services. An example of the positive effect of non-audit services could be gauged from the recent guidelines by the Financial Reporting Council (FRC, 2015), which introduced the revised Auditing Standards ensuring that the auditors are able to get some consultancy and advice regarding provision of non-audit services. Along with explaining its regulations, it also claims to provide guidance to audit firms on how they can use these supplementary services to their advantage, remaining within the ethical code of conduct. Even in case of pressure from the client regarding non-audit services, the auditor must first ensure its stakeholders that it produces completely transparent financial statements and should not get involved in suspicious practices, such as the KPMG case, where the companys accountants were doubted to be involvement in tax dodging, which they finally had to publicly admit. They then avoided the lawsuits by paying a huge penalty and accepting the conditions impos ed by the US Justice Department (Gwilliam, Teng and Marnet, 2014). Positive Reputation Effects Supporters of non-audit services do not contradict with the laws related to these services; they in fact believe that if the services are provided with the appropriate measures to safeguard auditors independence, they will end up being favourable for both the auditor and the client (Ernst Young, 2013). Advocates of this viewpoint also found that the income received as a result of providing non-audit services helps in enhancing auditors reputational capital, which is the firms goodwill in the market (Wang and Hay, 2013). Thus, to sustain their goodwill, audit firms would keep themselves from surrendering to their clients. Evidence from economic models suggests that audit firms may be willing to forgo short-term increases in earnings from non-independent behavior in anticipation of building a better reputation in the long run, leading to higher economic returns (Gwilliam, Teng and Marnet, 2014). Firms would, therefore, abide by the rules as they prove to be a powerful tool to safegu ard against any independence violence. Enhancement in Audit Training Some researchers believe that if auditing personnel are involved in providing non-audit services, they will not be able to perform the audit tasks in a complex business environment (Sori and Karbhari, 2006). On the contrary, proponents of non-audit services argue that by performing these additional services, junior auditors and audit trainees learn many skills which then help them become more competent accountants, which favourably impacts the audit firms independence and audit quality (Gwilliam, Teng and Marne, 2014). No Impact on Auditors Independence Some researchers believe that there is no relationship between provision of non-audit services and auditor independence (Jenkins and Krawczyk, 2001). Reviewing 20 years of literature, Salehi (2009b) did not find enough evidence about investors being concerned with non-audit services. Quick and Rasmussen (2009) also discovered that there is a lack of evidence supporting the claim that non-audit services are the reason behind impairment of auditors independence. Tepalagul and Lins (2014) study revealed that providing consultancy services to audit clients does not really affect the perceptions of the financial statement users about auditors credibility and independence; it in fact helps in enhancing the organisations internal control systems. Conclusion There are many reasons due to which an auditors reliability and independence may be compromised, one of which is often said to be the additional non-audit services provided by audit firms to their clients. Some researchers believe that these services pose to be a threat to the audit quality and independence by joint provision of both service types, higher non-audit fee and relationship with management. There are others who believe that these services positively influence auditor independence, whereby the audit quality is strengthened and the audit firm enjoys better reputational capital and enhanced audit training. There are still other researchers who found non-audit services to have no impact on the auditors independence. Numerous examples of firms are present supporting either of the three viewpoints; it all depends upon the auditors strategic moves by which it strives to safeguard its independence and the reliability of its work. The doubts financial statement users have about auditors performance can be handled well by standardized processes and transparency of information provided by audit firms. References ABP (2004). Ethical Standards 5: Non-Audit Services Provided to Audit Clients. The Auditing Practices Board. [Online] Available at: https://www.frc.org.uk/Our-Work/Publications/APB/ES-5-Non-audit-services-provided-to-audit-clients.pdf Adeyemi, S.B., and Olowookere, J.K. (2012). Non-audit Services and Auditor Independence Investors Perspective in Nigeria. Business and Management Review, Vol. 2, No. 5, pp. 89-97. Al-Ajmi, J., and Saudagaran, S. (2011). Perceptions of Auditors and Financial-Statement Users Regarding Auditor Independence in Bahrain. Managerial Auditing Journal, Vol. 26, No. 2, pp. 130-160. Chadbourne, and Parke, (2003). SEC Adopts Final Rules on Auditor Independence. [Online] Available at: https://www.chadbourne.com/files/Publication/40905c7b-de76-481d-a771-124300cc04ba/Presentation/PublicationAttachment/891d9f5a-b897-44ed-a141-004f2d922405/SECAdoptsFinalRulesonAuditorIndependence.pdf Chen, K.Y., Elder, R.J., and Liu, J.L. (2005). Auditor Independence, Audit Quality and Auditor-Client Negotiation Outcomes: Some Evidence from Taiwan. Journal of Contemporary Accounting Economics, Vol. 1, No. 2, pp. 119-146. Ernst Young (2013). QA on Non-audit Services. Point of View: Our Perspective on Issues of Concern. [Online] Available at: https://www.ey.com/Publication/vwLUAssets/EY-qa-on-non-audit-services-march2013/$FILE/EY-qa-on-non-audit-services-march2013.pdf Ezzamel, M., Gwilliam, D., and Holland, K. (2002). The Relationship between Categories of Non-audit Services and Audit Fees: Evidence from the UK. International Journal of Auditing, Vol. 6, No. 1, pp. 13-35. Frankel, R.M., Nelson, M.F., and Johnson, K.K. (2002). The Relation between Auditors Fees for Non-audit Services and Earnings Management. The Accounting Review: Supplement 2002, Vol. 77, No. s-1, pp. 71-105. FRC (2015). FRCs Work to Enhance Justifiable Confidence in audit through Implementation of the EU Audit Regulation and Directive. [Online] Available at: https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2015/September/FRC-s-work-to-enhance-justifiable-confidence-in-au.aspx Gwilliam, D. (2010). Trucking on: Audit in the Real World? (Man V Freightliner and Ernst Young). Journal of Professional Negligence, Vol. 26, No. 4, pp. 180-193. Gwilliam, D., Teng, C.M., and Marnet, O. (2014). How does Joint Provision of Audit and Non-audit Services Affect Audit Quality and Independence? A Review. Chartered Accountants Trustees Limited. [Online] Available at: https://www.icaew.com/en/products/audit-and-assurance-publications/~/media/481bd2be6ac7414cb4248996d259f8f5.ashx Hoffman, K.D. (2009). Services Marketing: Concepts, Strategies Cases. Third International Edition. Mason: South-Western. ICAEW (2015). The Provision of Non-audit Services to Audit Clients. [Online] Available at: https://www.icaew.com/en/technical/ethics/auditor-independence/provision-of-non-audit-services-to-audit-clients Ismail, I., Hasnah, H., Ibrahim, D.N., and Isa, S.M.(2006). Managerial Auditing Journal, Vol. 21, No. 7, pp. 738-756. IOSCO (2007). A Survey of the Regulation of Non-Audit Services Provided by Auditors to Audited Companies Summary Report. [Online] Available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD231.pdf Jenkins, J. G., and Krawczyk, K. (2001). The Influence of Nonaudit Services on Perceptions of Auditor Independence. Journal of Applied Business Research, Vol. 17, No. 3, pp. 73-78. Krishan, J., Zhang, Y., and Sami, H. (2005). Does the Provision of Non-audit Services affect Investor Perceptions of Auditor Independence? Auditing: A Journal of Practice Theory, Vol. 24, No. 2, pp. 111-135. Muir, S. (2014). The Provision of Non-Audit Services to Audit Clients Still a Difficult Circle to Square. CAPITA Asset Services. [Online] Available at: https://www.capitaassetservices.com/assets/media/SS14384_Non_audit_services_article-v4.pdf Okaro, S.C., and Okafor, G.O. (2009). Stemming the Tide of Audit Failures in Nigeria. ICAN Students Journal January/March, Vol. 13, No. 1, pp. 11-17. Pwc (2014). EU Audit Reform: Providing Non-audit Services. [Online] Available at: https://www.pwc.co.uk/assets/pdf/pwc-uk-eu-audit-reform-client-briefing-nas-7-aug-2014.pdf Quick, R., and Rasmussen, B.W. (2009). Auditor Independence and the Provision of Non-audit Services: Perceptions by German Investors. International Journal of Accounting, Vol. 13, No. 1, pp. 141-162. Quick, R., and Rasmussen, B.W. (2015). An Experimental Analysis of the Effects of Non-audit Services on Auditor Independence in Appearance in the European Union: Evidence from Germany. Journal of International Financial Management Accounting, Vol. 26, No. 2, pp. 150-187. Reynolds, J.K., Deis, D.R., and Francis, J.R. (2004). 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Leadership in Global and Multicultural Organizations Essay

Leadership in Global and Multicultural Organizations Essay Essay Prompt An analysis of an article is required for any class that is missed (as listed below). The analysis of an article will be 1-2 pages, single spaced, with one-inch margins. The analysis will include four topic headings: I. Article reference. List the bibliography information so that the instructor can find the article if he or she so desires. The article should be chosen from a respected journal or scholarly website. Furthermore, the article must relate to the corresponding chapter reading of that particular week. II. Summary. In this section briefly summarize the content of the article, identifying what makes this article unique. III. Relationship to readings. Describe the relationship between the article and the chapter readings. IV. Application. Describe how the content of the article could be used to change your workplace. Describe how the concepts could be applied to improve your organization. The company you use should be a company other than one for which you currently work. The analysis should include a description of the company, observed problems within the organization (related to the week’s readings), and recommendations for improvement. Summary of : Reading Assignments: †¢ Greenberg, J. (2013). Managing behavior in organizations: Chapters 5, 6, and 7 †¢ Spears, L. (1995). Reflections on leadership: Chapters 1, 2, 3 †¢ Rath, C. and Conchie, B. (2008). Strengths based leadership. Pp. 31-46 Essay The article dwells on the aspect of leadership and the contemporary globalized environment where the employees of all organizations are mixed in terms of age, experience, cultures and race. The three authors, all of whom are professors in different universities concentrate on discussing how organizations have become multicultural in nature and how the leadership must change to adopt the global leadership characteristics. Such a global leadership, they say needs to take into account the culture, the global strategy and the competitiveness of the competitiveness of the current market. Further, the article discusses the taxonomy of global leadership competencies and meta-competencies. In this respect, they discuss how ethics in the highly diverse cultural workplaces can be taught and the leaders need to conform to adapt to the needs of the organization and how this adaptation can be achieved. The article discusses how leadership competencies no longer confine to the behavior or personal ity or the values and knowledge, but those qualities that enable one to perform effectively in an environment outside their own nation and organizational culture. It is noteworthy how the article goes further to give how one can identify global leadership competencies and capability. The article stands out in various ways particularly in discussion of the topic therein. It sheds light on the aspect of leadership that is widened to cover the global platform and not just the localized approach. Further, it gives various real life examples that had taken place in different parts of the world, this gives it a global approach and easier to understand. It is also interesting and credit worthy that the article, in recognition of the global challenges on the cultural basis that women in leadership get, chooses to dedicate a significant section to discuss and highlight women in leadership and how they can manage to make it in the contemporary environment. Lastly, the academic value of the article is unquestionable since it comes out as a highly researched and referenced article looking at the numerous high quality references that have been used therein. This article has a close relationship with the chapters by Spears, L. (1995). Reflections on leadership: Chapters 1, 2, 3 in that they both highlight the aspects of the changing leadership dynamics in the contemporary world.   Spears reflect on servant leadership and how this approach to leadership has proven to be palatable with many organizations globally. In the same trend, this article also discusses how the global trends have reshaped leadership in a manner that it has to accommodate the diverse cultures and how it has to first reflect on the people among whom the leadership is being applied. Greenberg, J. (2013) in his book, Managing behavior in organizations mainly concentrates on the scientific approach towards organizational behavior and gives the practical ways that can be used by the managerial teams and good leaders in effectively managing the contemporary organizational environments. He highlights scientifically proven leadership approaches that take into account the c urrent challenges that come with the globalised scientific issues.  Ã‚   On the other hand, leadership is discussed by Rath, C. and Conchie, B. (2008) in their book Strengths based leadership as a virtue that goes beyond the work based aspects, but into intrinsic issues like hope, faith, individual stability and compassion. These are issues that a good and effective leader needs to be able to inspire in his followers since these help make the contemporary work environment more comfortable and development focused than in organizations without these. This article and the concepts discussed therein are instrumental in reshaping my workplace and the organization as a whole in that, bearing the continued cultural diversity of this organization, it can no longer be viewed as an American company anymore, but must now conform to the global standards. The organization, being that it deals with members of staff across a vast geographical demarcation and customers from a wide spectrum, there is need now more than before to deeply understand global leadership competencies and meta-competencies. References Prewitt J., et,al, (2011). Developing Leadership in Global and Multi-cultural Organizations. International Journal of Business and Social Sciences. Vol.2.No.13. https://www.ijbssnet.com/journals/Vol._2_No._13_Special_Issue_July_2011/2.pdf Spears, L. (1995). Reflections on leadership: Chapters 1, 2, 3 Rath, C. and Conchie, B. (2008). Strengths based leadership. Pp. 31-46 View or Download this full document in (.docx) format. --> Open Full Document Open full document and source list OR Order A Custom Written Essay Order a one-of-a-kind custom essay on this topic