PracticeConsultingUS audit independence questioned

US audit independence questioned

Companies buying non-audit services from their accountancy firms engage in more earnings management, according to research published in the US.

Produced by academics at Stanford University, the Massachusetts Institute of Technology and Michigan State University, the research paper examined 4,200 financial reports in an effort to investigate the independence of auditors.

The conclusion of the report said: ‘Taken together, our results indicate that auditor independence is associated with the size of non-audit fees relative to total fees.’

It added that ‘firms purchasing non-audit services are more likely to engage in earnings management.’

In February this year similar results were published by researchers at Lancaster University who concluded that auditors were less likely to challenge aggressive financial reporting from companies who also bought non-audit services.

However, the British research also found that clients of non-Big Five firms appeared to engage in higher levels of earnings management to meet ratio targets and analysts forecasts.

Links

US research paper

Research supports SEC rule change

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