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Accounting, Finance, SPSS
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Conflict of Interest When Audit Firms Earn From Non-Audit Services

Essay Instructions:

Please prepare a response post to the following:

There is definitely the possibility for a conflict of interest when an audit firm earns about as much money from non-audit services to a client as they do the audit services. More likely than not, this will create an issue, especially depending how reliant the firm is on the fees earned from the non-audit services. They then would have a vested interest in the company's success and ability to continue hiring the firm for those non-audit services, which could be negatively impacted based on the results of the audit. Thus, this could incentivize the audit team to omit findings, reduce professional skepticism, or any other number of fraudulent or deceptive actions in order to present the company in a positive light to the public, completely going against their professional duty to the public. For example, in the year end audit I just performed, there were a number of errors that negatively impacted the company. If we were also performing non-audit services, we may have been incentivized to not report on those errors or not tell the company about those errors which would be fraudulent. However, I do believe there are certain safeguards that can be put in place to avoid a conflict of interest in this situation. For example, at a large firm like one of the big 4, there is a small amount of reliance on any one client or service. However, there are definitely some very large clients at these firms that could have a significant impact if they were to be lost. A good measure to prevent a conflict of interest could be to have a completely different team performing the non-audit services and the audit services. This would reduce the familiarity impact as well as the likelihood that a team member would have full knowledge of the other services and results or details. However, this is a precarious situation and I don't believe the risk can ever be fully mitigated, as the auditors are expected to make independent judgements for their audit clients and if they have any motivations outside of performing a diligent, quality audit.

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Discussion Response Post
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Discussion Response Post
I agree with your analysis that there is a possibility of a conflict of interest when an audit firm earns substantial fees from non-audit services to a client. This creates a situation where the audit team may prioritize the client's non-audit needs over their professional duty to the public. It is important to note that an auditor's duty is not only to the client but also to the public who rely on the accuracy of the financial statements. According to Geiger, Basioudis, and DeLange (2022), the Inter...
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