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Split Decision

The state of the audit/non-audit fee debate.
Jason Karaian, CFO Europe Magazine
April 7, 2008

It was the last thing accounting professor Vivien Beattie expected when she hopped into a taxi in Cardiff, Wales, a few years ago. When the driver learned what she did, he launched into a tirade on the recent demise of Enron. Anyone could see, he said, the company was ripe for fraud given that it paid its auditor, Andersen, more for non-audit services than for audit services. Discussing this issue in this context made it clear to Beattie that the audit industry would never be the same.

The joint provision of audit and non-audit services is still much debated. In late February, governance activists urged shareholders of Sage, a UK-based software company, to vote against the re-appointment of auditor PricewaterhouseCoopers after it received roughly equal fees for audit and non-audit services in 2007. Though the resolution passed at the AGM, a sizeable 12% of the votes were either cast against PwC's appointment or withheld.

Surveys by CFO Europe in 2004 and earlier this year suggest that companies are decreasing the share of fees paid to auditors for non-audit services. (See "One-Stop Shop" at the end of this article.) Nonetheless, companies in certain countries and industries consistently pay their auditors more for non-audit services, according to a new report from Company Reporting, a research firm. (See tables at the end of this article.)

However, Tony Bromell, head of accountancy markets and ethics for the Institute of Chartered Accountants in England and Wales, thinks that shareholders will increasingly see the audit/non-audit fee split as a "red herring." A disproportionately large fee for audit services can compromise auditors just as much as a modest overall fee with a significant non-audit share, Bromell says. "Independence is not an end in itself. The end is a quality audit."

But if independence is key for audit quality, Beattie laments that it's "desperately difficult" to determine the factors that contribute to it. Currently at the University of Glasgow, she says that despite extensive research of her own and an exhaustive review of the literature, there is "absolutely no clarity" on whether fees for non-audit services cloud auditors' judgment.

What is clear, she notes, is that the public perception of joint provision remains "very dim." Yet recent research suggests that instead of blanket disapproval, stakeholders see benefits from auditors providing some non-audit services, such as tax advice. Potential conflict could be diffused, she says, if companies detailed the types of non-audit services they purchase. For Beattie, this would mean an "interesting refinement" that she is happy to discuss with anyone else who will listen.





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