The preliminary results of a survey by researchers at Lancaster University reveals auditors are less likely to challenge a company’s ‘aggressive’ financial reporting techniques when they also provide it with non-audit services.
The survey examined the links between estimated earnings management – such as the use of abnormal short-term accruals – and the level of non-audit fees relative to total fees.
The academics claim companies use short-term accruals, such as bad debt provisions, to manage earnings upwards to achieve certain targets.
In particular, earnings management to meet analysts’ forecasts is shown to be positively and significantly related to the ratio of non-audit to audit fees.
The results showed that when the provision of non-audit services is high, smaller auditors are less able to resist aggressive accounting by their clients.
Carried out among nearly 5,000 UK-listed companies from 1992 to 1998, the results of the survey will turn the heat up on auditors’ independence following the heated debate last year between the US Securities & Exchange Commission and the audit profession.
Gerry Acher, a senior KPMG partner and head of the ICAEW’s audit faculty said: ‘I want to look at the study in detail but it appears to be flawed in its simplicity.’
Professor Peter Pope, director of the Lancaster-based International Centre for Research in Accounting, said: ‘Although our research is preliminary, we believe that these first stage results will be of interest to wider academic, professional and other interested audiences.’
For more information on the report visit www.lums.lans.ac.uk.
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