The International Federation of Accountants (IFAC) in a statement released this week reiterated a caution to regulators about splitting up firms that provide both audit and non-audit services to clients.
"Multidisciplinary firms — offering both audit and other professional services — fill a valuable market need," the organization said in a point of view (POV) statement covering all aspects of high-standard audit performance.
The organization released research in September showing regulators' concerns over multidisciplinary audit firms misses the mark; audit firms have been shown to provide better service when offering both audit and non-audit services, because offering both helps them maintain a deep and broad range of expertise in-house.
"Superior audit quality can only be delivered if firms have the best people, services and knowledge at hand, and the multidisciplinary model is one of the best mechanisms to develop the skills, expertise and consistency needed for quality audits," the research concluded.
IFAC’s POV statement focuses broadly on what’s needed to ensure consistently high quality audits, but within its principles is a cautionary note to regulators.
"There is the risk that the cost of regulation outweighs the benefits," the group said. "Regulation can foster low-value defensive behaviors, or can result in unintended consequences such as impeding the ability of firms to attract and retain high quality individuals for their audit practices."
Regulators in the U.K and Europe are among those that have been looking at whether firms should be allowed to provide both kinds of services to clients. In the United States, the practice is allowed but restricted.
In general, any service that puts the auditor in a management role or provides a service that will itself be subject to audit — accounting, payroll, bookkeeping, preparing financial statements, among others — are prohibited under a professional "black list." Auditors are also expected to get buy-in from the company’s audit committee and any fees received for non-audit work are to be disclosed on the company’s financial statement.
In the discussions regulators are having about the practice, there’s a concern providing both types of services risks creating conflicts of interest. In the U.S., there have been a few cases in which the practice has caught regulators’ attention. In one case, the Securities and Exchange Commission hit PricewaterhouseCoopers with a fine of almost $8 million for not having adequate safeguards in place when it provided non-audit services to clients the company was also auditing.
"PwC repeatedly provided non-audit services without having effective quality controls in place for monitoring whether the services impaired its independence on audit engagements and were properly disclosed to audit committees," Anita Bandy, associate director of the SEC's Division of Enforcement, said when announcing the agency’s enforcement action.
Russell Guthrie, IFAC CFO, told CFO Dive in an interview last year that the issue isn’t about the adequacy of existing rules; it's about audit firms adhering to the rules that are already in place.
"In one sense, we’re saying the status quo might be adequate," said Guthrie.
