The research by Lancaster University suggests auditors have more difficulty in standing up to companies’ ‘aggressive’ financial reporting tactics when their firm supplies non-audit services to it.
It does not put Big Five firms totally in the clear, but says the problem is more marked among small firms. Jeremy Newman, audit partner at mid-tier firm BDO Stoy Hayward, said: ‘It’s curious. Commercially it’s easier for us to stand up to clients because the impact would be less severe on us.’
Martyn Jones, audit partner at Deloitte & Touche, criticised the researchers’ assumptions. ‘They’re trying to use ‘abnormal and discretionary’ accruals as a proxy for earnings management.’
Professor Peter Pope, director of the Lancaster University’s International Centre for Research in Accounting, said: ‘Earnings management occurs and some firms are openly criticised for being aggressive in their recognition of profits.’
The full research can be downloaded from www.lums.lancs.ac.uk.
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