Effects of nonaudit services at audit firms concern PCAOB, SEC

Regulators are asking whether the increasing provision of nonaudit and consulting services by audit firms poses risks to audit quality, and the PCAOB plans a formal examination of the issue in 2014.

The PCAOB plans to hold round-table discussions on the issue next year with audit firm leaders and other stakeholders, board Chairman James Doty said Monday at the AICPA Conference on Current SEC and PCAOB Developments.

Doty said the PCAOB is interested in examining the implications of consulting arrangements on the independence of the audit function and issues such as:

• How firms will avoid having their best personnel work in consulting at the expense of audit expertise and competence.
• What risks are associated with nonaudit business lines.
• How nonaudit activities affect resource allocation and investment in the audit function.

According to Doty, audit firms have said that the acquisition and ownership of nonaudit expertise benefits and supports audit expertise. He said those benefits need to be continually reexamined by firms and articulated.

“To what extent does it in fact enhance and support audit quality?” Doty told reporters after his speech Monday. “To what extent can it be maintained without the firm losing its identity as an audit firm? … I think these are the questions that the public has and will be with the audit firms for the long haul.”

SEC Chief Accountant Paul Beswick said at the conference that he is concerned about the effect that growth in firms’ consulting practices could have on their audit functions.

“It seems that while in the early 2000s, audit firms were disposing of their consulting practices because of regulatory constraints and restraints, more than 10 years later, those same firms now believe similar consulting practices can achieve greater growth under firm leadership notwithstanding the significant challenges,” Beswick said.

Beswick said the concern is being raised across the globe. A provision of a draft law approved by the European Parliament’s Legal Affairs Committee in April would prohibit audit firms from providing nonaudit services that could jeopardize independence. But the draft law has yet to be approved.

The discussion of nonaudit services in Europe has captured the PCAOB’s attention, Doty said.

“What are its implications … [for] the expansion of nonaudit services?” Doty said. “We simply can’t be unaware of the implications for independence, objectivity, skepticism, audit quality, of any of these developments. There is no syllabus that has written that down. It’s a process that is going to unfold, and we have to be attentive to the unfolding.”

Doty said it’s part of the PCAOB’s ongoing work to find out what a firm has done when it has announced a major acquisition or investment in nonaudit or consulting services.

“It’s going to be important for us to know what the firms are doing, which in their view should yield compliance with the SEC’s independence standards requirements and should not blend services,” Doty said. “They’re all going to be working very hard at that. And we’ve got to find out what their techniques are, what changes they’re making, what procedures they’re putting in place.”

Cindy Fornelli, executive director of the Center for Audit Quality (CAQ), which is affiliated with the AICPA, said the CAQ looks forward to discussing the issue.

“The CAQ welcomes the opportunity to discuss the profession’s approach to consulting work, its commitment to preserve independence and objectivity, and our view that the capabilities and skills used for consulting work can benefit audit quality and reduce risk for investors,” Fornelli said in a statement.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.