The Rise of Management Consulting Services within Audit Firms and its Effect on Audit Quality

• In Event: Audit Firm and Opinions

Abstract

Most prior research on auditor independence and audit quality and audit fees relates to the non-audit services (NAS) an audit firm provides to the same firm it audits. See Habib, (2012) for a meta-analysis on the subject. These NAS fees were deemed to be problematic and the Sarbanes-Oxley Act of 2002 banned audit firms from providing many of the consulting and other NAS to audit clients, greatly reducing the ratio.
However, little research has been done about this new concern over the increasing percentage of total revenue earned for management consulting services (MCS) versus audit services. The concern is different, in that the MCS is being provided to non-audit clients (Big4.com, 2009-2015). However, regulators are still concerned (Doty (2013), Harris (2014), Verschoor, (2014)) The concern now relates to the risk that the best resources and effort will be allocated to the more profitable MCS clients, decreasing audit effort and the level of resources allocated to audit (Harris 2014, Doty 2013, Verschoor, 2014), and will result in audit partners having less influence (Harris, 2014). In addition, these regulators feel that investors will perceive the audit as less valuable. (Harris, 2014)
This paper attempts to shed light on these concerns by investigating the issue using both an empirical and a behavioral approach

Authors

• Linda J Flaming, Monmouth University

• Nancy Uddin, Monmouth University