Proper Level Of Segregation Between Audit And Non Audit Services

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Abstract:The purpose of this research paper is to discuss the proper level of segregation between audit and non-audit services, to ensure independence and instill public confidence. In the wake of numerous accounting scandals of Enron, WorldCom, etc, the importance of auditor independence has been brought to the forefront of the accounting profession. The U.S. Public Company Accounting Oversight Board (PCAOB) has taken a strict stance on auditor independence, which signifies that an auditor cannot provide business advisory services without impeding their autonomy. However, an analysis of the current auditor-client relationship reveals contradictions to the interpretation of absolute auditor independence. In recent developments,
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For instance, AICPA’s Code of Professional Conduct contains over 200 pages of interpretive guidance on the topic of independence alone. The AICPA and PCAOB stress heavily on the importance of auditor independence, and for good reason. Financial statement users trust independent auditors’ ability to “obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” (AU-C 200.06) Auditor independence is required to instill public confidence in U.S. financial markets. Thus, the Public Company Accounting Oversight Board (PCAOB) has a strict view on independence in both fact and appearance. In AU 220.01, PCAOB states that an auditor “must be without bias with respect to the client.” More specifically, an independent auditor must be “free from any obligation to or interest in the client, its management, or its owners.” (AU 220.03) This strict interpretation of auditor independence was adopted as a means to restore public confidence in U.S. financial markets following the Enron, Waste Management, and other frauds in the early 2000’s. Unfortunately, the concept of strict auditor independence may be impossible in today’s public accounting environment.There are several environmental factors that influence perceived auditor independence. The underlying fee structure for accounting firms that audit public companies prohibits complete auditor-client
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