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Unformatted text preview: P ROFESSIONAL E THICS P ROFESSIONAL E THICS INDEPENDENCE AND NONAUDIT SERVICES In August 2000 the Panel on Audit Effectiveness of the Public Oversight Board 1 addressed the important issue of the effect of nonaudit services on independence. The Panel on Audit Effectiveness reported the following shift in revenues of the then Big 5 CPA firms. 1990 1990 1999 1999 All Clients SEC Clients All Clients SEC Clients Accounting and Auditing 53% 71% 34% 48% Tax 27% 17% 22% 20% Consulting 20% 12% 44% 32% Total 100% 100% 100% 100% During this nine-year period of time, the ratio of accounting and auditing fees to con- sulting fees for SEC clients changed from 6 to 1 to 1.5 to 1. This change led then SEC chairman Arthur Levitt to testify before the Panel on Audit Effectiveness as follows: Is the audit merely a conduit to the cross-selling of other, more lucrative firm services? I have grave concerns that the audit process, long rooted in independence and forged through professionalism, may be diminishedperhaps even sacrificedin the name of more financial and commercial opportunities. At the other end of the spectrum, Dan Goldwasser, a member of the American Bar Associations law and accounting committee, stated that Nonaudit services allow a firm to gain greater understanding of a company. The more an auditor knows about the com- pany, the better. Staff for the Panel on Audit Effectiveness performed its own in-depth review of the qual- ity of audit work performed in a sample of 126 audits performed for public companies. Of these 126 audit engagements, 37 also included significant consulting engagements for the client. The staff did not identify any engagements in which providing nonaudit services had a negative effect on the audit, and they concluded that in about a quarter of these engage- ments the performance on nonaudit services had a positive impact on the audit. Based on its findings and testimony before the panel, they agreed that: Independence is essential for promoting public confidence in the audit process and must be monitored continuously. As long as auditors provide nonaudit services to audit clients, there will be at least an issue with respect to the appearance of independence. 1 Students can learn more about the Public Oversight Board (POB) at http://www.publicoversightboard. org/about.htm. The POB was formed in 1977 to oversee the SEC Practice Section of the AICPA and functioned as an important component of the accounting self-regulatory structure until it was dis- solved in 2002. [ 3 [ ] There has been an explosive growth in nonaudit services in recent years, to the point where many large firms revenues from these services exceed their audit revenues....
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