Eldar Maksymov is Assistant Professor at the Arizona State University W. P. Carey School of Accountancy. This post is based on a paper, forthcoming in Accounting, Organizations and Society, by Professor Maksymov; Dain C. Donelson, Professor of Accounting at the University of Iowa Tippie College of Business; Matthew Ege, Associate Professor at the Texas A&M University Mays Business School; and Andy Imdieke, Assistant Professor of Accountancy at the University of Notre Dame Mendoza College of Business
Audit firms provide many services beyond those related to the audit of financial statements (FS). Historically, many of these “non-audit” services were provided to audit clients, causing regulators to be concerned about potential auditor independence impairment. The basic idea behind this concern is that by selling significant non-audit fees to their audit clients, auditors might compromise the quality of their FS audits. Thus, the Sarbanes-Oxley Act of 2002 (SOX) banned the sale of many non-audit services to public audit clients and required public-company audit committees to pre-approve all other non-audit services. Subsequently, three of the current Big 4 accounting firms spun off their consulting arms but have since rebuilt their consulting practices both organically and through acquisitions, with a focus on selling non-audit services to non-audit clients. In our study, we examine how the acquisition of consulting practices by the Big 4 might affect the quality of the audits they provide.
Though today the Big 4 provide most of their consulting services to non-audit clients, regulators have expressed concern about whether the shift in focus towards growing consulting practices could negatively affect audit quality. Specifically, regulators are concerned that the growth of consulting business at the Big 4 could lead to the firms becoming primarily consulting firms rather than primarily audit firms. This could result in the audit practice, and thus, audit quality, not being of primary importance to firm leadership. Overall, regulators are concerned that firm culture could shift away from an audit mindset to a consulting mindset (one focused on client advocacy).