External Auditor and Provision of Non-Audit Services

Keywords: Provision of non-audit services (NSA) and stakeholders’ perspectives, Regulators and non-audit services (NSA) threat, Audit regulation of the UK and international ethical standards, Audit Assignment Writing Services


Accounting and audit firms have been transformed into organisations and in particular large international firms (Big 5). The primary focus of these firms is no limited to audit but provision of other financial services which are associated with the audit. These services are loosely categorised under the umbrella of knowledge services and known as non-audit services (NAS). The extent and range of such services have paramount important in fee income. The duality of relationship based on audit and non-audit services posed threat to auditor independence (Habib, 2012).

This essay is categorised into two sections. First, it analyses advantages and disadvantages of the provision of NSA from multiple stakeholders’ perspectives. Second, it evaluates how regulators seek to reduce NSA threat with the particular focus on regulation of the UK and international ethical standards.

Arguments for and against the provision of NSA to audit clients

Advantages of provision of NSA

Improve audit quality

It is important that auditors have the strong knowledge base and knowledge of pre-existing results and evidential inquiry which is useful to form an independent opinion for quality of financial statements. In an era of globalisation and technology, where business processes have become complex, NAS add values to the client through an essential understanding of client activities. A value added activity such as Business risk audit which is part of client risk management strategy allows to focus on corporate governance an control environment and thus, auditor has knowledge of business is important for assessment of management integrity (Svanstrom, 2013).

Economic benefits and risk management

Adelopo (2016) explained that in the light of expectation theory, auditors are useful to narrow the information gap. The reason behind joint services is economies of scope which result in cost saving and improve services because understanding of company operations and activities. In accounting literature, known as knowledge spill-overs based on transformation process towards production of knowledge and information which result in better use of asset or contracts (contractual economies). For example, information required to improve the internal control system is identical to information requirement for internal control improvement.

Therefore, auditors are in better position to review and advice on financial system. The exchange of professional services (contractual nature) involves high transaction cost due to information asymmetrical. Therefore, it is worthwhile using existing contracts to safeguard brand name, control system and client confidence (Hay, Knechel and Willekens, 2014).

Disadvantages of provision of NSA

Auditor fee dependence

Schmidt (2012) stated that auditors are 100% dependent for fee from client in the UK irrespective of NAS services. The loss of client means company loss the income stream and affect both partners and managers associated with client. Moreover, there is possible pressure on auditors for inappropriate client accounting procedures particular when audit firm is likely to have substantial NAS revenues. In the past, critics have highlighted audit firms performing below cost audit to gain access to NAS. Nevertheless, little empirical evidence supports strong perception for loss audit client result in loss of NAS services (Schmidt, 2012).

Lack of independent review

Aziz and Omoteso (2014) described that in the light of theory of inspired confidence, auditor function involves independent examination. The auditors in a situation where audit firm is responsible for advice to client for financial and related systems have raised concerns. The auditor may be reluctant to probable into operations and in the case of malpractices, auditor may not report finding to wider stakeholders. There is possible conflict of interest arising from NAS including corporate finance, taxation and personal selection.

For example, Ernst & Young (EY) NAS service for UK trucking company (ERF) has impaired the quality of the audit. The company accountant falsifies VAT return on a number of accounts for excise customer repayment. The lack of integrity of financial statements compromises the interest of shareholder and investor (Botes, Low and Taylor-Dayus, 2013).

Management relationship with auditor

According to Agency theory agent is accountable to principle. The auditor independence is threatening from the provision of NAS and relationship between auditor and management affect the audit approach. In the UK, auditors have been viewed as a quasi-judicial monitor of financial reporting. The auditor is economically dependent on its client for the fee from audit and NAS with raise possible conflict of trust.

For example, as in the case of Enron, the setting up of tax avoidance scheme through special entities consider as acceptable accounting practice. There is a likely situation where the interest of external stakeholders to whom auditor reports (shareholders) is likely to compromise because of personified relationship with client management (Quick, Sattler and Wiemann, 2013).

Regulation to reduce threats from NSA to audit clients

Auditor independence – professional and legal perspective

Liddy (2014) elaborated that auditor independence means a character function with attributes of trustworthiness and integrity as well as ability to resist against client pressure. Auditor independence risk likely risking the issue auditor objectivity through presenting compromise information to external stakeholders. In the US, Sarbanes-Oxley Regulation enclosed details on NSA provision whereas regulations are different in the UK. In the context of public choice theory, in the UK, ICAEW proposed regulations and EC recommendations as well as security and exchange commission (SEC) provide framework for auditor independence.

ICAEW guidelines and independence of mind highlights that integrity implies truthfulness and fair dealing and independence in appearance represent taking public interest and perception into consideration for ‘Public Interest Entities (PIE)’ (Kleinman, Lin and Palmon, 2014).

From empirical literature, Arrunada presented complete analysis on economic of audit and examined mechanism to safeguard quality of audit. The study examines consequences of NAS provision and impact on quality, cost, independence and reputation (Arrunada, 2013). Moreover, Campa and Donnelly (2016) highlighted that the current regulatory environment in the UK is based on two pronged. Companies in the UK required disclosing NAS fee paid in the annual reports

The inclusion of independent framework to which auditor registered in the UK must adhere in order to provide NAS services. Moreover European commission recommendation on auditor independence further divided the NSA discourse into tax advisory, assurance and other (composition provided).

Ethical reasoning and independence

Regan (2015, p. 466) explained that Ethical reasoning involves studying personal attributes of auditors’ rather external influences during making the individual judgement. The two types of ethical reasoning are deontology and consequentialism. Deontology represents actions which deemed morally obligatory and consequentialism highlight actions which are judged based on their consequences.

The individual factors likely to affect auditor’s independence (decision-making) are values, personality factors, stage of career and motivation. The factors which pose independence risk are contingent fees, financial dependence, potential employment and interpersonal relationships. The table below enclosed taxonomy of audit and client types (Samsonova-Taddei and Siddiqui, 2015).

AccommodatorsCrusadersTrustersSafe hands
Auditor has moderate professional integrity and bend rules under pressureAuditor has  extreme level of personal and professional integrity and escalate the potential issuesWith moderate professional integrity and insufficient questioning for roleAuditors have high level of professional integrity and work closely with client to identity problem and escalate the issues.

Threats and safeguards

In the UK, principles based approach is used to identify the threats auditor independence and ensure safeguard to minimise the threats.

ThreatsDescription and examplesSafeguard and regulation
Self-interestThe auditor statutory independence threatened by self-interest or financial conflict. E.g., Fear of losing client / dependence  on feeIn context of ICAEW Code of ethics for professional accountants section 290 as well as European regulation 537/2014 the safeguards includes

·    Regulatory sanctions from legal and professional framework such as disclosure requirement, auditing standards and ethical guidelines

·    The safeguard through firm internal activities such as division of responsibilities, staff development, quality control, consultation and independent review

·    Corporate governance within organisation particular audit committee


Self-reviewAuditor have problem in maintaining objectivity to conduct self-review procedures. For example, Judgement on previous services performed
Advocacy threatThe threat rises when auditor advocates client position. For example, Promoting client business or advocating on client behalf during litigation
Trust or familiarityStatutory auditor influence from personality and qualities of client and resulting become sympathetic to client. E.g., long relationship with client which result in excessive trust
Intimidation threatThe threat of removal from   the services which deter the objectivity of auditor. For example, Influential trust on overbearing client

Source: (Botes, Low and Taylor-Dayus, 2013; Hayes, Wallage and Gortemaker, 2014; ICAEW, 2016)


The public perception of NAS is that it undermines quality of audit and compromise independence of auditor. The analysis highlight that NAS has both advantages and disadvantages. NAS improve quality of audit through knowledge through contractual economies and knowledge spill-over but NAS prevision seems to threaten independence and appearance of audit. The regulatory frameworks recognise the auditor independence and provide comprehensive guidelines to ensure integrity and objectivity of auditor.

In the UK is based on two pronged. Firstly, the companies in the UK required disclosing NAS fee paid in the annual reports. Secondly, the inclusion of independent framework to which auditor registered in the UK must adhere in order to provide NAS services. Ethical standards and code of conduct for professional accountants are useful to minimise the threats associated with NSA to audit client and increase trust of external stakeholders.

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