2. Recently the Securities and Exchange Commission has been concerned with the \

ID: 2805059 • Letter: 2

Question

2. Recently the Securities and Exchange Commission has been concerned with the "independence" of external auditing firms. It is especially concerned about how large non-audit (such as consulting) fees might impact how aggressively auditing firms pursue accounting issues they uncover in their audits. Congress recently passed legislation that prohibits accounting firms from providing BOTH consulting and auditing services to the same client. How might consulting fees affect auditor independence? What other conflicts of interest might exist for auditors?

Explanation / Answer

No doubt independence of auditors is very necessary for the good business environment because auditors are such pillar on which many stakeholders rely. On the basis of report of the auditors stakeholders make sure that financial statements are free from errors and stakeholders take their relevant decisions. If independence of auditors is not there then it will create huge problem for every stakeholder.

So SEC concern about the independence of external auditors looks reasonable.

Most of the firms requires consultinng services before taking various business decisions apart from this different types of complexities are associated with the financial reporting in the firm that why role of consulting service becomes very significance but if consulting and auditing both are done by the same person then it will create big problem for the various stakeholders.

Consulting fees can affect independence of the auditors because due to such attractive fees auditors may show some additionl favor for the firm and give some undue advice which may hammer on the interests of the various stakeholder. So no dount consulting fees can affect fair auditing services of the external auditors. Hence we can say that consulting fees and auditing services both affect each other in given case.

There may be a conflict when an external auditor is performing both functions like consulting and auditing because as per true & fair practices of an profession an expert required to perform his / her duties honestly and if a person is performing both function then one function will be definitely ignored. So it is not possible for an professional to perform both types of functions with full sincerity due to double and contradictory burden. As a result we can say both function will present confliction against auditors.

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2. Recently the Securities and Exchange Commission has been concerned with the \

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