In the late 1990s and early 2000s, accounting firms came under scrutiny for providing non-auditing services to their clients. Statistics for the (then) “Big Five” accounting firms (Andersen, Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers) indicate that about 45% of their revenues came from auditing, 25% from tax work, and the remainder from consulting and other services, which includes information systems consulting and internal audits.
Some observers called for a ban on the provision of non-audit services by accounting firms. They argued that auditor independence was being compromised under the status quo.
As a partial response to this lobbying, in late 2000, the U.S. Securities and Exchange Commission (SEC) adopted new rules requiring public companies to disclose the amount of fees paid to their auditors, separately for audit and non-audit services.
In the wake of the collapse of Enron in 2001, there were renewed calls for the separation of audit and non-audit sendees. On February 6, 2002, Deloitte & Touche announced that it would separate its accounting and consulting divisions; a week earlier, Pricewater-houseCoopers made a similar announcement. Previously, the consulting arm of Arthur Andersen became a separate consulting firm now known as Accenture.
Required:
Discuss the relevant issues raised by the above facts in relation to financial accounting theory. Focus on the issues relating to moral hazard.