Auditor independence is one of the key foundations of the public trust in financial accounting. Some very high profile accounting scandals put this trust in jeopardy. In response, the Sarbanes-Oxley Act of 2002, in conjunction with the Public Company Accounting Oversight Board (PCAOB), have regulated the accounting industry and provided a higher level of scrutiny to increase levels of auditor independence, resulting in more reliable audit opinions, and in turn, financial statements.
On December 4, the SEC stated that it is monitoring the growth of non-audit consulting services that are being provided by accounting firms. There is concern because, for U.S. accounting firms, the revenue from non-audit services makes up about 70 percent of their total revenue, a drastic increase from about 30 percent 20 years ago. Brian Croteau, a deputy chief accountant in the SEC’s Office of the Chief Accountant, stated that consulting practices can create risks to an accounting firm’s focus on audit quality.
While accounting firms must submit to a preapproval process to provide non-audit services to audit clients, a lack of oversight of the actual services provided can create issues with auditor independence if the nature of the services provided exceeds the scope that is allowed to be performed. Additionally, members of the PCAOB have expressed concerns regarding the investment which accounting firms have made into providing non-audit services. They are also evaluating whether some of the consulting services provided create a conflict that diminishes auditor independence.
Going forward, in order to promote auditor independence, the SEC will focus on work supplied by accounting firms to their audit clients and ensure that it does not extend beyond tax compliance or result in advice that leads to aggressive tax planning. This same attention will be paid to audits performed by brokers and dealers registered with the SEC.