by Merlin Hernandez

Many analysts refer to the potential conflict of interest when auditing firms provide additional consulting services. I agree that the same accounting firm providing auditing and consulting services to a client can present some conflict of interest based on the notion that a more organic relationship can serve to compromise objectivity. But expanded auditor consulting services may not necessarily run afoul of Sarbanes-Oxley and its non-audit service restrictions. Consulting services have traditionally been provided by large accounting firms to expand the utility and applications of the technical expertise they provide. Auditing firms have a unique perspective that businesses find valuable. They bring an informed external perspective to business challenges for which their work offers deeper insights. A ban on non-audit services (like tax services, and some management consultancies) to audit clients will effectively subvert audit quality and effectiveness of the services. Total restriction will reduce the cumulative knowledge needed to identify problems and would limit auditor verification of information necessary to understand and evaluate a firm’s activities.
To strike some balance between conflict of interest and the integrity of the auditor/client relationship, the SEC has identified nine audit services that are unlawful for an auditor to provide. These include client financial statements, legal services, investment advice or services, SME services, and actuarial work, among others. A registered accounting firm may provide any non-audit service not listed as long the service is approved in advance by the audit committee of the issuer. This is a provision to ensure that non-restricted services are subject to careful scrutiny under the aegis of fiduciary responsibilities and ethical governance before being contracted.

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