BNA reports that:
Securities regulators are unfurling preliminary yellow flags on the rise in big accounting firms' non-audit consulting business, warning that it presents a potential risk to auditor independence. James Kroeker, chief accountant of the Securities and Exchange Commission, spoke Dec. 6 at a major accounting conference about his hearing word of “a rebuilding of the consultancy practices within large accounting firms.” The Sarbanes-Oxley Act of 2002 bars outside auditors from conducting a range of non-audit consulting and other work for their clients. Acting on long-time concerns of the SEC and others, Congress erected those walls after accounting scandals in the decade before the legislation, including the Enron and WorldCom debacles, and perceived shortcomings in the accounting profession's self-governance. “I trust that the profession will not need to relearn lessons of the past on the serious, adverse effects of under-investing” in the quality of the audit “or failing to strictly maintain the independence of their audit process,” Kroeker said at the conference sponsored by the American Institute of Certified Public Accountants.
There are two distinct issues here. First, does providing nonaudit services to clients iminge on auditor independence? In my forthcoming book Corporate Governance After the Crises, I argue that the answer to that question may well be "no":
Yale law professor Roberta Romano compiled the results of numerous studies of auditor performance and concluded that the “overwhelming majority” “suggest that SOX’s prohibition of the purchase of non-audit services from an auditor is an exercise in legislating away a non-problem.”[1] Most of the studies found that there was no connection between provision of non-audit services and the quality of the audit. Several even found that auditors who provided non-audit services performed higher quality audits, presumably because providing such services gives the auditor more and better information about the company. ...
[P]roviding non-audit services permitted auditor and client to take advantage of economies of scale and scope. The knowledge gained in providing non-audit services could permit the auditor to perform the audit more efficiently. The expertise and knowledge gained in conducting audits improves the quality of the auditor’s non-audit services. Because accounting firms were willing to discount services when clients purchased both audit and non-audit services from the same company, the ban on non-audit services raised costs by forcing issuers to hire two accounting firms. This is another example of how SOX raised the cost of being public. Because accounting costs are a disproportionately large budget item for smaller firms, it also is another example of how SOX especially hurts such firms
[C]onsolidations and the demise of Arthur Andersen have shrunk the Big Eight to the Big Four. Only they have the resources, expertise, and global reach to effectively audit large public corporations. If such a corporation gets non-audit services from three of the Big Four, it is effectively locked into the fourth as its auditor.
The bottom line is that we either ought to ban the Big 4 from doing non-audit work, so as to promote competition, or repeal the rule against the outside auditor providing non-audit services. Based on Romano's evidence, I favor the latter. Since the SEC is unlikely to go that route, however, it needs to seriously consider the former.
[1] Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 Yale L.J. 1521, 1535-36 (2005).
