Table of Contents

INTRODUCTION...........................................................................................................................................1
PROVISION OF NON-AUDIT SERVICE...........................................................................................................1
Conclusion:..................................................................................................................................................2
References:..................................................................................................................................................4

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INTRODUCTION
In addition to conducting financial and performance audits, there are many audit
organizations that also provide other professional services such as non-audit services.
Non Audit Services can be simply defined as professional services other than audits or
attestation engagements.

Some examples of non-audit services provided by auditors for their clients are
preparation of the client’s financial statements and advocating for the clients before a
supervisory body.

PROVISION OF NON-AUDIT SERVICE

Recently, the appearance of more professional service firms is as a result of the
increasing demand for non-audit services by companies in order to aid them in achieving
competitive advantage over rival companies, but the provision of non-audit services has
been feared by regulators to have a negative impact on and be a potential threat to audit
firms’ independence. (Icaew.com, 2014),

This could be due to a variety of reasons such as; the weakening of auditors’
independence due to the fact that the fees received from non-audit services could make the
auditors financially depend on their clients and the nature of some non-audit services could also
place auditors in a managerial role e.g. auditors being responsible for an internal audit
management role in the client company.

The provision of non-audit services by auditors to their audit clients will for sure
reduces total costs, increases technical competence and motivates more intense
competition. Moreover, these services do not necessarily damage auditor independence
nor the quality of non-audit services. This assessment leads to recommending that
legislative policy should aim at facilitating the development and use of the safeguards
provided by the free action of market forces. Regulation should thus aim to enable the
parties—audit firms, self-regulatory bodies and audit clients—to discover through
competitive market interaction both the most efficient mix of services and the
corresponding quality safeguards, adjusting for the costs and benefits of each possibility.
Particular emphasis is placed on the role played by fee income diversification and the
enhancement, through disclosure rules, of market incentives to diversify.

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 There has been real corporate scandals involving both client companies and their
auditors over the provision of non-audit services and one of them will be summarized
below.

For example, The Lehman Brothers Scandal (2008)

Participators: Lehman Executives & Ernst and Young auditing company.

This case gained worldwide attention as it involved the largest bankruptcy ever
recorded, even bigger than GM, WorldCom and Enron. Lehman Brothers Holdings Inc.
was a leading global financial services firm and before its bankruptcy, the 4th largest
investment bank in the U.S. Ernst and Young was also reported to have helped Lehman
Brothers in manipulating the books by using an accounting trick called ‘Repo 105’ that
disregarded the ‘Substance over Form’ accounting principle (Marketwatch, 2005).

With ‘Repo 105’, Lehman Brothers and Ernst and Young were able to disguise $50
billion worth of loans as sales. They did this by entering agreements with banks situated
in the Cayman Islands in which Lehman Brothers sold them toxic assets with the intent of
buying them back at a later date. This accounting trickery helped create the impression
that Lehman Brothers had more sales and cash available and less toxic assets. (Sharp,
2010)

The US Securities and Exchange Commission (SEC) filed various lawsuits against
Lehman Brothers but the financial firm wasn’t persecuted due to lack of evidence, Ernst
and Young however were fined $99 million (Brown, 2013).

Conclusion:
In conclusion since such evidence as there is indicates that there is no correlation
between levels of non-audit fees and audit failure, comprehensive safeguards are already
applied, and rigorous separation of non-audit services seems likely to increase the cost
and reduce the quality of the audit, the suggestion should not be pursued. Assuming no
undue overall economic dependence results from the auditor/client relationship and
adequate safeguards can be implemented, we believe that companies themselves should
determine whether they use auditors for non-audit services, in consultation with the
profession's guidelines.

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 In my point of view, I would apply the principles that I have learnt, same with the
Generally Accepted Government Auditing Standards (GAGAS) which they helps to
provide guidance in regards to non-auditing service for clients and it does this in the form
of 2 principal principles and 4 safe guards for auditors and they are:

Principles:

1. Auditors should avoid provide non-audit services that involves them making
managerial decisions or performing management functions.

2. Auditors shouldn’t audit their own work or provide non-audit services which are
significant to the audits focus matter.

Safe Guards:

1. Auditors should document their deliberations of non-audit services and also their
conclusions about the service’s impact on their independence.

2. Auditors should before undertaking any non-audit service, first inaugurate an

understanding with their clients in writing that the client’s management is responsible for:

 Representation of the non-audit service’s subject matter.

 All Practical outcomes of the non-audit service.
 Decision in all matters pertaining to managerial functions in relation to the
provided non-audit service and accepting total responsibility of these decisions.

3. Auditors should remove any and all staff that provided the non-audit service from
the team that would be auditing the subject matter of the non-audit service in order to
prevent the Self review threat.

4. Auditors are barred from underperforming the scope and extent of an audit work
below an acceptable level if the non-audit service was carried out by a third party firm.

I would handle ethical conflicts faced in my daily working life by treating others
with caring and compassion, doing no harm, I will be proactive and courageous and, I
will consult with professionals if the moral issue is one I cannot resolve.

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References:
1. Bob Vause: Guide to Analysing Companies, Fifth Edition; Bloomberg Press, 2009
2. Lindberg, D.L. & Beck, F.D., 2004. Before and After Enron: CPAs' Views on
Auditor Independence. The CPA Journal Online .
3. Mautz, R.K. & Sharaf, H.A. (1961) ‘The Philosophy of Auditing’, American
Accounting Association
4. Dunn, J., 1996. Auditing Theory and Practice. 2nd ed. Prentice Hall.Auditorn
Independence - General
5. Baker, R., 2005. The Varying Concept of Auditor Independence: Shifting with the
Prevailing Environment. The CPA Journal Online.