Case 4-1

4. The main auditor independence issue surrounding performing internal auditing, external auditing, and consulting services for the same client is the fact that management hires the auditor and pays the auditor for their services. And this is only made more of an issue when an auditor performs other services with even more profitable fees. There is an inherent lack of independence built into the auditing profession, but this does not mean the auditor completely lacks independence, just that the auditor can never be one hundred percent independent. The more services the auditor performs for the client, and the more fees the auditor collects from the client, the worse this problem gets. The auditor gets closer to the client, and they don’t want to risk their relationship (and the other services) with the client by giving the client “bad” news. This becomes a problem when the auditor becomes lenient during the audit and with management.

The main problem with this independence issue when an auditor performs non-audit services for a client is the perceived lack of independence. To be fully independent, and auditor must be seen as independent by an outside party. And when an auditor begins performing multiple services for a client over a long period of time, an outsider is going to be more likely to see a lack of independence. If an auditor lacks independence, or is seen as lacking, the auditor’s reputation can be severely damaged. This was the case with Anderson, and losing their reputation was a fatal blow to the company.

But, that is not to say that there is no argument to be made for allowing auditors to perform non-audit services for their audit clients. One argument for this is the more familiar the auditor is with the client, the more effective and efficient the team can be during the audit. So if the auditor also performs the internal audit, he will be much more knowledgeable about the client, and therefore lowers the chances of issuing an incorrect audit...