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Regulators, investors, and other financial statement users get concerned with the independence of auditors who engage in non-audit services with clients such as consulting services. The view of the statements users is that, when the auditors engage in other contracts with the clients other than the auditing services, their independence from their clients and the management of the organizations will be compromised because of conflict of interests. In this research review, the focus is on the independence of auditors in relation to the provision of non-audit services to the clients. In this context, the literature relating to auditors' independence and the perception of the users of statements will be analyzed in addition to the specifications and regulations provided by the auditing bodies.

Non-Audit Services Provision by the Auditors and Auditing Firms

There are various activities that auditing firms engage in that are not associated with the auditing services to firms in the organizations they audit. These activities are termed as the non-audit services and there are various arguments for and against the provision of these services by the firms in the context that some view the services as a window that the client management can use to compromise the independence of the auditors (Adelopo, 2013, p. 98). In this light, researchers have continually tried to analyze the impact of non-audit services on the independence and qualifications of the audit reports in order to come up with a conclusive analysis of the impacts. However, these researches have not come up with conclusive results, and the topic continues to be a well debated. Although in 2002 the Congress of United States regulated the Sarbanes-Oxley Act over the same matter that regulates how the auditing firms engage with the clients they audit in the public corporations, there continues being arguments and opposition to the laws (Schmidt, 2012, p. 25-84).

There are various prohibited activities that a registered accounting firm engaging in independent auditing of public companies cannot engage in according to the provisions of the Sarbanes-Oxley Act in order to protect the independence of the reports that they give to the stakeholders. For instance, any activity that contributes or relates to the bookkeeping and financial statements of a firm cannot be engaged in. In addition, the firms are prevented from financial information systems design and implementation, actuarial services, fairness opinions, appraisal and evaluation services, internal audit outsourcing services, and any other service accounting board determines. These provisions are based on the need for the firms to be able to stay independent from their clients since they may not be independent enough to provide fair audit reports. To this end, the organizations are presently deemed to be functioning independently of the clients' management whose accounts are audited (Willekens, 2005, p. 65). There continues to be arguments and debate regarding the impact of the non-audit services provided by the auditing firms to the clients on the independence of the auditors. The following arguments investigate the researches findings on the implications that the non-audit reports may have on the independence of auditors and thus, the qualifications and quality of auditors' reports.

Non-Audit Services Oppositions

Non-audit services offered by auditors have for long been cast as the backbone of the financial revenue for the auditors’. However, these non-audit services usually result to higher revenue for the auditors than the auditing services that the auditing firms provide to the clients leading to more focus on the source of revenue by the auditors in total disregard of the legislation that view non-audit services as being the main cause of bad perception regarding the independence of the auditors. Recent scandals and perceived audit failures are attributed to the accounting and auditing professionals press on financial revenue from the companies that they audit or work for. Substandard levels of audit services are usually perceived as sourced from the non-audit services that these firms provide to the companies they are supposed to independently evaluate leading to questions of the place of non-auditing services. The objectivity of the reports that the auditors give to the stakeholders is always perceived to be flawed in case the auditors have engaged in other services with the organizations (Knechel & Sharma, 2012, Pp. 85-114). In this perspective, it is critical for any auditor to evaluate the impact of the non-audit services provided by the perception of the stakeholders of audit reports.

Non-audit fees that are paid by companies for the provision of non-audit services are usually higher than the fees that come from the auditing services since the management of companies usually value the services more than the audit reports. Then pervasiveness and extent of the economic or financial factors that are aligned with the contracts of non-audit services to the firms has led to many users of the financial statements that are audited by the firms to be concerned with the quality of services or reports given by the auditors and apprehensive about the auditor’s veritable independence. The Sarbanes-Oxley Act of 2002 was legislated in order to try and curb the menace since it has been argued that the auditing reports are usually more of subjective explanations than objective analysis of affairs of the organizations (Willekens, 2005, p. 87).

Brandon and Mueller (2009) notes that, non-audit services contracts provided by clients to auditors could be used as a great tool through which clients use in order to achieve their end expected results or outcomes from the audit of their financial statements audit. Since the non-audit services provided by auditors are always highly priced than the audit services, clients’ management has the potential of influencing the auditors to provide them with thedesired reports in auditing when they perform the audits of financial statements. This may compromise the objectivity of auditors when performing the audit of the books of accounts of the books of accounts as thy may fear losing the lucrative contracts of non-audit services from their clients (Knechel & Sharma, 2012, pp. 52-62). Many of the appearance issues found in many public companies concerning the required disclosure and auditor-client relationship have been found to be moot. Institutional safeguards should always emphasize on the independence of the auditors in order to enhance the independence of the actual auditors and help protect the objectivity of the auditors in the organizations. Opponents of non-audit services argue that the non-audit services are a great tool that could compromise the objectivity and independence of auditors through the continuous reminder of the auditors on the lucrative services that they will later be contracted to perform when they give the needed and expected outcomes of audit reports by the management. Investors should be guaranteed of the authenticity and objectivity of the audit reports provided by the auditors in order to enhance the protection of their investments (Schmidt, 2012, p. 45).

Auditor tenure and the continuous occurrence of opinion qualifications have been used by researchers in literature as the main surrogates for various undetectable and unseen variable interests in the independence of auditors. The main concern of the researchers regarding the provision of non-audit services is that, many large accounting firms that are contracted to perform non-audit services such as the lucrative internal auditing of the firms they audit could be more concerned about the future of their contracts and thus, their independent judgments are usually impaired. Many auditing firms that have great interest to grow and expand exchange contacts with the clients’ management in order to try and get other contracts from the firms that they audit and the continued connection between the auditors and the clients lead to some agreements that may not be good for the clients. Though there is no enough empirical evidence that tie non-audit services to the independence of auditors, it is really a concern to researchers that the increase in interest by auditors to engage in more non-audit services with the clients is a sign of higher fortunes that could be used to get the clients management their desired outcomes (Knechel & Sharma, 2012, p. 68).

Knechel and Sharma (2012) argues that the economic bonding that exist between auditors who provide other services to the clients other than auditing could lead to the compromise of the quality of audit provided by the firms. In this context, the opponents of non-audit services provision by the firms suggest that the efficiency of audits may be compromised as there is usually a noted decrease in the audit reports time lags when the non-audit fees are higher for firms. Knowledge spillovers is a great concern for firms as they argue that when they engage similar firms to perform audit of their firms and the non-audit services the auditors will be well aware of the issues and risks positions in the firm which may lead to a decrease in the time taken by such firms to form reports and thus, provide the firms with more objective reports. In addition to this, the firms will be charged lower fees since the firms will connect both contracts in order to give leverage to the firms (Knechel & Sharma, 2012, pp. 99-102).

Investigations on the effect of non-audit services performed by firms external auditors and the perception of auditors independence in the bond market prove that there could be some compromise in the perception of auditors in the bond market. Researchers analyze that there is a negative relationship between the amount and degree of non-audit services provided by the auditing firms on the bond rating process. Non-audit services are used as a benchmark by auditors for prediction model and could lead to changes in the way they carry out their independent functions. Bond rating is seen to very much affect by the non-audit fees charged by the audit firms and thus, there is quite a relationship between the independence of the auditors and the non-audit services provided (Callaghan, Parkash, & Singhal, 2012, pp. 162-170).

Schmidt (2012) investigated whether audit litigants have concerns that the non-audit services provided by auditors are used by the jurors to associate the services with the independence of auditors and thus prove of substandard auditor performance. The use of the audit failures of firms between 2001 and 2007 and analysis of the non-audit fees and the ratio of non-audit services fees to the total fees to the auditors was used to form the end analysis. This research found that, the client fees provided act as evidence that the auditors could not be independent and thus audit litigants use the service fees to strengthen their case against auditors and affect the courts resolution in the lawsuit. In this context, audit services quality and the resultant lawsuits could be as a result of the non-audit services provided by external auditors to the clients (Schmidt, 2012, p. 105).

The debate about the effects of the auditor provided services continues to be a controversial topic with both opposition and support from researchers to allow the auditors to perform non-audit services. For instance, the cases of auditors of Enron and WorldCom companies have been cited and described widely as cases of having conflict of interests where there was leniency on the part of auditors to detect flaws in the accounting systems of the companies since the clients purchased a wide range of services from the auditors and thus compromised the independence of the auditors. As a result of the two cases that resulted in having many years of court litigation cases with auditors and accountants of the organizations, the United States Congress introduced the Sarbanes-Oxley Act of 2002 (SOX) in order to strengthen the confidence of the markets. The non-audit services were perceived by the United States markets as being the causes of auditors' lack of independence leading to numerous accounting scandals. These allegations lead to lack of confidence in the markets and thus, it is always a perception in the markets that influence the flow of activities (Callaghan, Parkash, & Singhal, 2012, p. 45).

Prohibition of non-audit services offered to clients by the auditing firms was met by strong disagreement by the accounting professions citing the effects on the synergies that result when firms offer a wide range of audit and non-audit services to their clients. In addition, the professionals emphasize the need to have knowledge growth and the scope of knowledge that result when firms engage in non-audit services with the clients. These indications of the sources of revenue and the learning more of the clients that they audit are strong indications that in a real sense, there is always knowledge spills between the audit and non-audit functions of the organizations. In this context, there is always a strong debate as to whether such knowledge spills has beneficial or costly effects on the quality of both the audits and non-audit services provided. The Sarbanes-Oxley Act of 2002 aimed at prohibiting the auditors from providing non-audit services to clients based on the belief that the economic auditing that result from such engagements is highly likely to undermine the independence of the auditors and, therefore, compromise the quality of the audit reports that are produced. To this end, the auditors are restricted in order to enable them to be more focused and determined to deliver quality work without the unnecessary conflict of interests with the clients’ management (Knechel & Sharma, 2012, p. 85).

The main concerns regarding the non-audit services offered by auditors necessitated the United States Congress to formulate the regulations in order to enable the auditors to be more objective in their audit reports. The debate over the laws raised issues on how the auditors may be bribed through promises of better and highly paying contracts in order to make the reports appear as the management would deem fit and favorite to them. In addition to this, exposure to the management circles during the non-audit services activities leads to the auditors making favorite decisions and judgments in order to safeguard their positions and continue acquiring the contracts. In this context, the opponents of auditors having the ability to offer non-audit services argue that the auditors will end up performing their duties in the interests of the management instead of having a free and fair analysis of the financial statements to report clear opinion to the investors and other stakeholders such as government taxation authorities. In addition to this, the lack of independence influences the perception of the investors and the market players leading to low markets interests by the investors (Knechel & Sharma, 2012, p. 78).

Auditing reports are based on the opinion of the auditors regarding the financial statements that they audit in order to give the stakeholders the view of whether the accounts should be used for decision-making. In addition to this, the auditors must express whether they were able to get all the books of accounts that were necessary for their investigations in order to allow the investors analyze how their finances are utilized in the organizations they have invested in. In this case, the management is the party involved in the supply of audit materials and financial statements to be investigated by the auditors. Such involvement in the audit process is supposed to be quite professional and allow the auditors perform their activities well. On the contrary, non-audit services and contracts between the auditors and client management allow for more involvement that may create even informal knowledge on the operations of the management and this is the main concern of players in the organization as it may lead to collaborations for financial gains. In cases of litigations against the auditors, there are always issues dealing with the operations of auditors in the organizations other than audit services (Willekens, 2005, p. 102).

Non-audit Services increases Auditor Independence Viewpoint

In their journal Auditor-Provided Non-audit Services and Audit Effectiveness and Efficiency: Evidence from Pre- and Post-SOX Audit Report Lags kneel and Sharma (2012)argues that there are some academics who view the non-audit services provided by the auditors as a chance for the increase in effectiveness in performance of their duties. Some researchers argue that there has never been any found empirical evidence that relate the non-audit services to the compromise of auditor independence and thus, all the attributions made are based on perception and cannot be proved. In this context, the arguments are said to be based on the perception of the investors and researchers since the non-audit services help in spilling knowledge that could otherwise be unavailable and unknown to the auditing firms. On the other hand, the decrease of audit reports lags, suggests some researchers, should only be lauded since it means that the knowledge acquired during the non-audit services helps in enabling the auditors to complete their audits in an efficient way and will most likely enable them to give quality reports. The essence of efficiency in the auditing process generally entail the use of few inputs in order to get the needed reports while effectiveness relate to how the auditor can be able to complete the audit process with the expected and objective results (Knechel & Sharma, 2012, pp. 102-185).

An examination of the implications that resulted from the going concern opinions by the auditors and the end non-audit services revealed that there is never a clear relationship between the audit reports and the non-audit services offered by the auditors. Through the research, the researchers found out that the perception of the investors can only be minimized through the application of clear mechanisms that will enable the investors understand the implications of the services to the audit reports. In the European Union, there are provisions that require the auditing and accounting firms to report the number of hours and fees payable by different clients offered services. In this context, the regulations help in determination how the different levels of fees paid to the firms may contribute to the firms exercising discretion in the performance of auditing services. To this end, the investors are guarded by the Accounting and Auditing Institute against manipulation and lack of independence of the auditors (Schmidt, 2012, p. 96).

Other supporters of non-audit services offered by the accounting and audit firms such as tax consultations and financial advisory services as a great source of revenue that is much needed by the firms in order to advance their firms and enable them to be objective in their functioning. The accounting firms get an essential revenue from the firms and, therefore, they will be greatly affected by such regulations. For instance, the independence of the firms comes from the fact that financial corruption and bribes would be ineffective in persuading them to offer client-based opinions. Without such financial freedom, it would be easy to compromise the independence of the firms through promises of better remunerations. On the other hand, the non-audit fees have been proved to have a positive impact on the audit hours that auditors spend in order to come up with an audit report (Adelopo, 2013). The essence of this positive contribution of non-audit services is that the auditors usually access better information regarding their clients and thus, they will be able to identify risk areas in the organization and, therefore, end up giving more credible evidence in the reports. Furthermore, the time that the auditors spend in the client organizations enable them to plan well as they will be able to understand what is the most ailing and important parts of the organization. In regard to the accessibility of organizational financial statements books, there will be little conflict since the auditor will be conversant with the client and will be readily able to get all the documents needed to perform the audits (Schmidt, 2012, p. 82).

In a recent research to investigate the effects of tax related, accounting related and other non-audit service on the audit hours used by auditors on a sample large international firm indicates various results that support the fact that non-audit services increase the urge for firms to have auditing of their firms and this is done effectively. Tax-related fees of the non-audit services were analyzed and found to have positive impact on the measures of audit effort and to minimize the audit hours since the activities involves a lot of knowledge spills to the auditors enabling them to make significant progress and achievements. In this regard, it has been argued that non-audit services by far contribute to the easing of the work that is required to be performed during the actual auditing work and thus lead to lower costs and more experience and knowledge of the firms (Callaghan, Parkash, & Singhal, 2012, pp. 63-78).

Evidence from companies that are listed in United States and Australia were found to be consistent with the fact that there exists no relationship between the audit reports qualifications and the non-audit service fees paid to auditors. This observation further proves that the audit reports qualifications have no concrete relation with any non-audit services offered by the auditing and accounting companies (Knechel & Sharma, 2012, pp. 96-108). Any relationship that exists may be from other factors such as corruption or mere perception by the investors and market observers. To this end, the accountants and auditors have argued that prohibitions put in place by the Sarbanes- Oxley Act of 2002 are baseless and lack any empirical evidence backing and thus, should be replaced with more professionalism oriented laws. More recent research examining any association between audit and non-audit services using non-audit fees equations to try and provide evidence been found to lack any consistent results. All the results from information analysis and perception of investors only find evidence of knowledge spillovers during the non-audit services provided by auditors. To this end, the analysis that is done on impact of knowledge spillovers results to positive attributes of the knowledge spillovers on the audit time lags and audit reports qualifications (Willekens, 2005, p. 72).

Findings and Conclusion

The debate and research of the impact of non-audit services on the authenticity of the audit reports provided provide different viewpoints of the same topic. One of the arguments is in support of the auditors being able to provide non-audit reports and the other argument is in favor of a strict and regulation by the authorities to prevent the audit firms from engaging in non-audit services that are restricted in the SOX Act. On the other hand, accountants and their bodies of professionals argue in favor of non-audit services citing several advantages to the auditing profession. In this context, it is clear that there still requires being continued research and analysis of the market in order to ascertain the real significance of non-audit services to the independence of auditors. Further, the accountants and auditors should be allowed to give their arguments on how to maintain the independence of their audit reports from manipulation. To this end, a conclusive approach will be used, and proper approaches and models used to determine the activities that should be prohibited.

Bibliography

Adelopo, I. (2013). Auditor Independence: Auditing, Corporate Governance, and Market Confidence. Gower Publishing, Ltd.