This comes at a time when a major part of the auditor independence debate has been the provision of non-audit services. Critics see them as unmanageable threats and believe they should be banned. The profession and others have argued that, while there may be a threat, it can often be managed through safeguards and there are benefits to clients and the business world. Standard-setters and regulators have very largely agreed.
The research becomes even more important with the new regulatory era and the Ethics Standards and Auditing Practices Boards with their lay members. They will undoubtedly look at such research and we will need to review it, both in terms of the way it was carried out and the conclusions reached. If either is unsatisfactory, it must be rejected but, if they are valid, we will need to respond to the findings.
The research report does not stand alone and was issued with a press release with different language to the report’s conclusions.
The dry terminology of ‘discretionary accruals’ becomes ‘creative accounting to manage corporate earnings’, with references to ‘aggressive’ financial reporting. It is unfortunately more likely that standard setters and others will read, and be influenced by, the press release than the research report.
Several aspects of the report need to be challenged. What does ‘earnings management’ mean? Some earnings management is unacceptable and contrary to accounting standards. But the report’s approach might be encompassing accepted practices, such as a sales drive before year-end to improve turnover and profits. This may make us uncomfortable, but the sales and profits are earned and recognised.
The benefits of non-audit services should be considered as well as the effect of the Financial Reporting Review Panel and the growing impact of quality control and assurance. Many influences are at work on audit quality and to focus on one is difficult and potentially misleading.
Prof Pope states the research is preliminary and asks for feedback. Let’s take up this offer; it’s too important to remain silent.
- Roger Housechild is head of the audit faculty at the ICAEW
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