Audit firms have expanded far from their roots. They now offer a range of tax, business and IT consultancy services which earn higher margins than traditional compliance work. As two giants, Coopers & Lybrand and Price Waterhouse, decide whether to merge, the variety of services that companies can receive from any one firm looks set to increase further. Inevitably, conflicts of interest arise, so is there a limit to the amount of extra services UK businesses should take from one audit firm?
It is a problem the auditors themselves are aware of. An ethical framework established by the Chartered Accountants Joint Ethics Committee (CAJEC) requires auditors to examine threats to their independence. An audit firm, or individual office, should not accept an audit assignment from a listed client where total recurring audit and non-audit fees represent 10% of gross practice income. 'You have to demonstrate that you conduct a regular review when you are anywhere near 5%,' says CAJEC secretary Jack Maurice.
Indeed it has recently been suggested that the 10% limit be cut, and 5% has been mooted as a possibility. It is also essential that audit committees play a key role where auditors supplied 'a substantial volume of non-audit services' to a client, attempting to 'balance the maintenance of objectivity with keeping costs to a minimum'.