美国独立审计dissertation-Do Non Audit Services Impair Audit Independence?

美国独立审计dissertation-Do Non Audit Services Impair Audit Independence?(由英国dissertation网-英文dissertation代写中心提供）

Introduction and Motivation
Many audit firms suffered audit failures recently in China. Deloitte & Touche became involved with Kelon’s scandals, giving out unqualified audit reports on Kelon’s financial statements which contained material errors. KPMG was forced by the Chinese Ministry of finance to restructure. The other BIG 2 also got into trouble. Once again, the audit independence issue draws the public’s attention.

There is a long-standing public policy debate about whether an audit firm should be allowed to provide both audit services and non-audit services (NAS) to the same publicly held company in western countries, especially in the US after the Enron scandal. The Securities and Exchange Commission (SEC) speculates that ‘this relationship may impair investor confidence in the auditor independence and lead to declining confidence in public capital markets.’ ‘The audit function is simply being used as a springboard to more lucrative consulting services’, stated Levitt, SEC Chairman.

However, in China, the audit situation is different from western countries. The major services provided by audit firms are audit services. NAS is only a small part of the total services provided by accountancy companies. Audit failures persist in this context. It is worth mentioning that many of those audit failures occurred due to the auditor’s shortage of relevant business information. The question of whether NAS should be promoted in China has become a hot topic recently.

The motivation of this research is to learn from western countries’ audit experiences and form the Chinese audit formulation to regulate the audit market better. Under the circumstances of economic globalization, more and more foreign companies are getting into the Chinese market. The regulated audit market is necessary and essential to attract the foreign investment, which seek legal protection and audit credibility. Moreover，a regulated Audit market can help Chinese accountancy companies to meet the fierce competition of foreign accountancy companies. Most importantly, regulated market will raise the public confidence towards the financial statements provided by accountancy companies, and therefore promote a more efficient and healthy stock market. 

Should we promote more NAS in china? In order to answer this question, there are two steps to follow. The first step is to analyze whether the NAS impairs audit independence. The second is to address how essential the NAS is in today’s Chinese climate. Case studies will be used in this article to solve these problems. Most previous research uses experimental methodology to analyze whether there is a negative relationship between NAS and audit independence by investigating the non-audit fees. However, the audit services and NAS’s characteristics themselves have never been mentioned. In this article, real life cases will be used to analyze the independent issues. In particular, the nature of Audit and NASs will be analyzed. Two real life cases will be utilized. One is the Enron scandal and the other is a Chinese audit failure suffered by Zhongtianqin accounting company. The conclusion that there is no direct relationship between companies providing NAS and impairment of audit independence will be given, by analyzing the Enron case. By analyzing the Chinese audit failures, we can draw the conclusion that NAS should be promoted in China.#p#分页标题#e#

The first section of this study is a literature review. In second section, two cases will be illustrated and analyzed. Some suggestions for how to improve the Chinese audit market will be given in the final part to complete this article.

Literature review
There are many researches examining the provision of NAS and its potential threat to the auditor’s independence.
      
The research that has been completed primarily relies upon auditor fee disclosures from the late 1970s that was required by Accounting Series Release No. 250 (ASR No. 250), Disclosure of Relationships with Independent Public Accountants (sec 1978). ASR No. 250 was effective for a limited period from September 30, 1978, until it receded in 1982. In general, early research conducted based on ASR No. 250 data does not find that the provision of NASs impairs perceptions of auditor independence (e.g., see Scheiner 1984; Glezen and Millar 1985; Antle et al. 1997). SEC conducted some surveys concerned the audit independence in 2002. However, none of the studies recommended the separation of auditing from consulting.

A related and more recent stream of research investigates whether non-audit fees impair independence in fact (DeFond et al. 2002; Francis and Ke 2002; Frankel et al. 2002; Ashbaugh et al 2003; Chung and Kallapur 2003; Geiger and Rama 2003; Reynolds et al. 2004). Frankel et al. (2002) find that non-audit fees are positively related to companies beating analysts' forecasts as well as the magnitude of discretionary accruals. However, subsequent research suggests that the results of Frankel et al. (2002) fail to replicate their results (Francis and Ke 2002; Ashbaugh et al. 2003; Chung and Kallapur 2003; Reynolds et al. 2004). Moreover, further research has failed to find evidence that non-audit fees impair auditor independence where independence is proxied for by the propensity to issue modified audit opinions (DeFond et al. 2002; Geiger and Rama 2003). In general, this research provides little evidence to suggest that auditors providing NASs to audit clients impair auditor independence in fact. (Brandon, Crabtree,and Maher, 2004, p89)
An alternative stream of research suggests that non-audit fees can impair the perception of audit independence (Brandon, Crabtree,and Maher, 2004, p89). Some experimental studies using professional decision makers show that the perception of auditor independence is negatively affected by material business relationships with client companies (e.g., Lowe and Pany 1995, 1996; Swanger and Chewning 2001). In addition, some empirical studies examine the reaction of equity market participants to the disclosure of auditor fees. Frankel et al. (2002) use an event study methodology and find evidence of a negative stock price reaction to the unexpected portion of non audit fees rather than the level of these fees. Ashbaugh et al. (2003) perform similar analyses, but some other information disclosed in proxy statements are used. They find no evidence that the market reacts to the information contained in the ratio of non audit fees to total fees collected by the firm's auditor.#p#分页标题#e#

Raghunandan (2003) investigates stockholder voting to approve incumbent auditors. His results indicate that voting to ratify the auditor is negatively associated with the level of NAS provided, but similar to Frankel et al (2002), the effect is very small in practical terms. Raghunandan (2003) concludes that the majority of shareholders do not perceive NAS to impair independence. Francis and Ke (2003) report that the market valuation of earnings surprises is significantly lower for firms that exceed $500,000 in non audit fees and also pay more for NAS than the audit. Contrary to many recent studies, they find the economic impact to be substantial, with a 77 percent reduction in the market valuation of earnings surprises. Finally, Hackenbrack and Elms (2002) revisit the ASR No. 250 fee disclosures and find a negative association between stock returns and non-audit fees for sample companies with the highest ratio of non-audit fees.

These previous researches were mainly conducted by investigating non-audit fees. This reflects that the concerns over the NAS’s effect on audit services are due to the high fees rather than the nature of the NAS itself. In other words, if the NAS cannot provide high profit, it will not draw so many concerns. A Case study will be used to analyze the association between the NAS and audit independence trough the NAS’s characteristics in this article.    

Case Study
The Enron case will be analyzed in this study to answer the question as to whether the audit independence will be impaired by NAS. The Zhongtianqin case will be used to demonstrate the problems in the Chinese audit market and address the importance of NAS under today’s auditing circumstances.

The reason I choose the Enron case is that it is a typical case in the issue of NAS impairing audit independence. Although the Enron scandal is now many years past and seems a too well known case that too many articles and studies have already analyzed from different aspects, it remains the best choice as in discussing the NAS issue, the first case thought about is the Enron case. This is the same reason for choosing the Zhongtianqin case. The Zhongtianqin case has as great impact in China as the Enron case has in the US.

Both of the cases have been discussed too many times in China, which is evidence that those two are typical cases and therefore, the conclusion drawn through this case study will be more believable. Previous studies have only taken one of those two as a topic. There is no study comparing different cases under Chinese audit circumstances. This study will analyze both of them. All the data in this article is secondary data which was collected through internet and relevant articles.

Enron & Andersen
On October 16, 2001, Enron Corporation of Houston, Texas, one of the largest corporations in the world, announced it was reducing its after-tax net income by $544 million and its shareholders’ equity by $1.2 billion. On November 8, it announced that, because of accounting errors, it was restating its previously reported net income for the years 1997-2000. On December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. With assets of $63.4billion, it is the largest US corporate bankruptcy. Enron’s bankruptcy is of particular interest to accountants, because its longtime auditor, Arthur Andersen, LLP (Andersen), is (or was) one of the Big 5 CPA firms. It has been charged with gross dereliction of duty and even fraud by the press and members of the US Congress (amongst others), and is being sued in many lawsuits for very substantial damages. Critics have emphasized that, in 2000, Andersen was paid $25 million in audit fees and $27 million for non-audit consulting. In this case, the general beliefs of the public are that the audit independence will be impaired by providing NAS, especially when the non-audit fees are higher than the audit fees. Therefore, the providence of NAS is regarded as the major cause leading to the audit failure. (Benston and Hartgraves , 2002)#p#分页标题#e#

However, as Joseph Berardin, the former CEO of Arthur Andersen, argued, Enron with the total assets of Enron is $650 billion and annual revenue over $1000 billion has the largest electronic business system in the world, and therefore the complexity and scale of the audit work must be huge. In this case, the fees charged on Enron are not incredibly unreasonable. Meanwhile, the NAS provided by Andersen are very necessary, because some of them are always or can only be provided by certificated professional accountants. Therefore, the NAS provided by accounting companies will not impair audit independence.

In the Enron case, $3.5 million out of $27 million non-audit fees are tax preparation and advice which are normal services provided by most accounting firms, so there is not any beneficial conflict in this case. Another $3.2 million was paid for the audit over a new accounting system which was designed and installed by one of the Big 5 companies. Moreover, $4million was the consultancy fees paid to Accenture, the previous Andersen Consulting company and Andersen was apart from Accenture in August 2000. Furthermore, there are other services which must be provided by accounting companies. Taking into account all the factors stated above, the fees paid for NAS were only $13.3 million and fees charged upon each individual consultancy or service did not exceed $3 million. In other words, the fees charged over audit services or audit related services were more than 70% of total fees charged. The conclusion that NAS impair the audit independence is unreasonable. 

Furthermore, it is normal in this era for non-audit fees to be higher than audit fees. KPMG charged Motorola $62.3 million for consultancy fees and $3.9 million for audit fees in 2001. The non-audit fees paid for E&Y by Sprint were $63.9 million; by contrast, the audit fees were only $2.5 million in the same year. PWC charged AT&T $48.4 million for consultancy fees while $7.9million for audit services. The yawning gap between audit fees and non-audit fees cannot prove that NAS threatens audit independence. If this was the case then the scandal should have happened to Sprint rather than Enron, which only had $2 million differences between audit and non- audit fees.

Lessons learned from Enron:
Though we cannot form the conclusion that audit independence will be compromised by NAS through the Enron case, it does not mean that Anderson was innocent. There are many factors leads to its collapse.

‘Andersen’s partners and staff do not appear to have exercised the requisite skepticism that auditors should adopt. Rather, they appear to have accepted too readily management’s valuations and determinations with respect to valuations and related-party transactions. It is possible that this presumed lack of skepticism and distance is simply a failing of the particular auditors-in-charge. It could also be a consequence of auditors having been associated with Enron for many years. (Familiarity may breed over-involvement with and empathy for managements’ worldview, rather than contempt.) Instead perhaps the auditors in charge of the Enron audit may have overlooked or supported their client’s overly ‘‘aggressive’’ accounting, misleading, and possibly fraudulent accounting practices in order to protect their very salaries and bonuses. Another option is that as many critics have charged, the gatekeepers may have been corrupted by the sizeable audit, and possibly the non-audit fees paid by Enron.#p#分页标题#e#

Andersen’s audit personnel also might have been incapable of understanding the complex financial entities and instruments structured by Enron’s chief financial officer, Andrew Fastow. These auditors dealt with Enron when it was an oil and gas producer and distributor. In recent years, it became primarily a dealer in financial instruments and a developer of new ventures. For reasons that have yet to be explained, Andersen did not replace these auditors or (apparently) provide them with the requisite expertise. Another lesson, then, is that CPA firms should ascertain that their personnel are capable of dealing with the presently existing activities of their clients.’ (Benston and Hartgraves, 2002, p 124)

Yinguangxia & Zhongtianqin
On July 30, 2002, Yinguangxia, a Shenzhen-listed company was filed for alleged stock fraud. This is the first group of lawsuits against the company that have been accepted by the courts after the China Securities Regulatory Commission (CSRC) confirmed in late April 2002, after an investigation, that Yinguangxia filed false profit reports. The CSRC found that the annual business reports of the company from 1998 to 2000 included fraudulent profit claims totaling more than 17 million yuan (US$2 million), 177 million yuan (US$21 million) and 567 million yuan (US$69 million) respectively, according to an earlier Xinhua report. The company was then fined 600,000 yuan (US$72,000) by the CSRC. After the news broke out the share price of the company slumped sharply, hitting investors with huge losses.

The discovery of Yinguangxia's illegal activity exposed Shenzhen-based Zhongtianqin, one of China's Big Five accounting firms accounting firm, which helped Yinguangxia fabricate profit reports to appear like a top performer. Despite the accounting fraud, Zhongtianqin also suffered an audit failure which was mainly due to a lack of relevant foreign trade knowledge. Zhongtianqin’s license has been revoked by the Ministry of Finance.

Zhongtianqin did not provide non-audit services to Yinguangxia, however, it still suffer the audit failure. In other word, audit failure result from many factors as illustrated in the Enron case rather than the provision of NAS itself. 

The Zhongtianqin case exposes the audit problems which widely exist in the Chinese audit market. Firstly, Zhongtianqin’s auditor failure was caused by the auditor’s lack of knowledge of the Yinguangxia’s business. Zhongtianqin’s auditors are lacking in knowledge of the international regulations and rules of foreign trade. 

In order to perform an effective and efficient audit it is essential that the auditor gains a thorough understanding of the client (its organization, strategy, key personnel, etc), its business, its business processes and risks, and its industry. SAS 210: Knowledge of the business states:
Auditor should have or should obtain a knowledge of the business of the entity to be audited which is sufficient to enable them to identify and understand the events, transactions and practices that may have a significant effect on the financial statements or the audit thereof.#p#分页标题#e#

Knowledge of the business is used by auditors in, for example, assessing risks of error, in determining the nature, timing and extent of audit procedures and in considering the consistency and reliability of the financial statements as a whole when completing the audit. The auditors’ level of knowledge for an engagement normally includes a general knowledge of the economy and the industry within which the entity operates, and a more particular knowledge of how the entity operates.

This requirement of auditors’ understanding of clients’ business is under the circumstances of the business risk approach which has been widely accepted in today’s audit environment.

Under the business risk approach, the auditors are encouraged to provide the advisory services to clients as the value added dimension. However, the NAS in China hasn’t been well developed. Audit is still the only service provided by the Accountancy companies in most cases. As value added dimension (NAS) requires the broad knowledge of the client’s business, they can promote the effectiveness and efficiency of the audit work. Some audit risks can be avoided by widening auditors’ knowledge of the whole business environment instead of focusing on financial statements. Therefore, NAS should be promoted in the Chinese audit market to guarantee a more efficient and effective audit. 

Secondly, some of Zhongtianqin’s auditors are appointed as the financial consultants by Yinguangxia. However, the current Chinese audit regulation does not give a clear classification of consultancy and audit. Therefore a more clear classification is urgently required to be encoded in current audit regulations. 

After analyzing the cases, let us consider the relationship between audit services and NAS. Is there conflict between them? Do NAS impair the audit independence and audit quality?

The Nature and Characteristics of Auditing:
As Mautz and Sharaf (1985) stated, auditing, unfortunately, does not have any ‘built-in’ characteristics that assure the skeptic of its integrity and independence. However, auditing suffers from what may be described as ‘built-in anti-independence factors.’ Inherent in that nature of public accounting work as now performed are a number of features which to the layman, are almost certain to cast the shadow of suspicion on the auditor’s protests of complete independence.
The close relationship which the profession of public accounting has with business.
Apparent financial dependence
Existence of a confidential relationship
Strong emphasis on service to management
The organization of the profession.
Tendency toward emergence of a limited number of large firms.
Lack of professional solidarity.
Tendency to introduce ‘salesmanship’
‘It is a fact of life in public accounting that fees come from clients, and public accountants are directly dependent on business companies for the greater part of their revenues.’ (see Mautz and Sharaf, 1985, p211)#p#分页标题#e#

It is clear to see that auditing itself has the characteristics of dependence on clients, though the aim of its existence is to audit the financial statements independently, in order to provide the financial statements’ users with the accounting credibility. Moreover, the close relationship between accountancy companies and their clients’ management is also a characteristic of auditing rather than of the NAS.

The provision of the NAS is a means of increasing firm revenues. It does not conflict with the auditing characteristics. Therefore, there is no evidence that the NAS impairs auditing independence. If seeking a maximum profit means impairment of independence, the auditing itself has already impaired the audit independence. Therefore, we can conclude that as independent accountants, auditors are capable enough to act independently, with or without advisory services. ‘As has been pointed out by others, the appearance of independence is almost as important as independence itself. Unless auditing has the confidence and respect of those who use its services, such services will not long be in demand and certainly will not be expanded into the broader areas of public policy.’ (Mautz and Sharaf, 1985, p213) If this is not the case (i.e. the auditors are not capable to act independently), the banning of the advisory services will lead to more audit fraud as auditing itself is the only way to make the profit.

In fact, the accountancy firms are more willing to act independently to keep their reputation in order to attract bigger clients and earn greater profit.

The History and development of Non-audit services
In order to analyze the relationship between the audit and NASs, it is necessary to look at the auditing history.

In fact, the major functions of the accountancy companies were making financial reports and providing NASs since the eighteen century.  As Previts and Merino stated, ‘until the 1933 and 1934 federal securities acts, public demands for audits decreased, and the profession’s obligation to third parties was obscured. The direction and growth of accounting practice was in the area of credit reports to bankers, as advisors to businessmen, and as tax experts. The New York Stock Exchange consistently refused to acknowledge the need for independent audits of listed companies before 1926.’ Obviously, the consultancy services, prior to audit services, were normal services provided by accountancy companies. Just as Previts and Merino (1979) addressed, the public and regulators didn’t pay much attention to audit services until the 1920’s. The audit work took no more than 50% of total services provided by the accountancy firms until the last century. Take the instance of Whinney，Smith & Whinney, one of the oldest British accountancy practices, which has been providing no audit services since their establishment. (See table 1) However, it did not provide audit services until the 1860’s. “An early recognition of the expanding scope of services offered by auditors was found in a statement adopted by AICPA Council in 1947. The services described in that statement were tax advice, accounting assistance, advice to businesses in the installation of accounting and cost systems, budgeting and internal control. However, independence concerns were not raised at that time.”#p#分页标题#e#
Table 1:The percentage Composition of Whinney, Smith and Whitnney’s Fee Income (1848-1960)
Year Insolvency Accounting Auditing Taxation Trustee & Executorships Special Work Total
1848-1859 77.93% 12.29%   7.13% 2.65% 100.00%
1860-1869 89.69% 6.03% 1.93%  2.16% 0.20% 100.00%
1870-1879 93.63% 2.38% 2.18%  1.74% 0.07% 100.00%
1880-1889 61.00% 9.63% 23.38%  4.03% 1.98% 100.00%
1890-1899 26.90% 16.53% 48.00%  4.00% 4.57% 100.00%
1900-1909 30.03% 11.27% 48.87% 0.35% 4.80% 4.70% 100.00%
1910-1919 40.05% 7.58% 41.60% 1.63% 3.35% 5.80% 100.00%
1920-1929 26.03% 9.50% 51.40% 4.27% 4.00% 4.80% 100.00%
1930-1939 3.60% 12.40% 69.37% 6.07% 2.33% 6.23% 100.00%
1940-1949 3.48% 8.75% 68.45% 7.80% 1.73% 9.80% 100.00%
1950-1959 1.73% 6.80% 64.30% 12.17% 1.87% 13.13% 100.00%
1960 0.20% 8.50% 59.70% 11.10% 2.40% 18.10% 100.00%
Jones.(1981), Accountancy and the British Economy 1840-1980: The evolution of Ernst & Whinney, London: Batsford. pp.47-99

There is no doubt that the emergence of audit also promotes the development and enlarges the scope of the NAS. Audits provide a platform for NASs. The 1947 AICPA statement suggested that many NASs had their roots in the audit practice. They evolved from requests by audit clients for additional services that their auditors seemed best suited or capable of providing, as well as from the special skills needed to audit new and complex business transactions. Today, effective audits depend more than ever on specialists. For example, specialists used in audits include:
Technology and systems specialists
Actuaries, to help evaluate risk management controls, insurance companies’ reserves, and pension and other benefit accruals
Treasury specialists, to help evaluate controls over cash management, financing, currency and derivatives
Tax specialists, to help evaluate tax liabilities and deferred tax assets
Valuation specialists, to help evaluate the reasonableness of valuations of financial instruments, stock issued for assets or services, and allocations of the purchase price of acquired businesses

The accountancy companies gain more information through audits and therefore are able to supply more precise advice and consultancy which enhance the quality of the NAS. From the client’s perspective, the consultancy services provided by accountancy companies are preferable because accountancy companies as the independent provider of audits are more likely to keep business secrets for their clients than other consultancy organizations. Furthermore, accountancy companies are more familiar with the clients’ management, internal system through auditing the clients and therefore are more likely to be able to provide high quality consultancy services.#p#分页标题#e#

Moreover, there has been an explosive growth in NAS in recent years, to the point where many large firms’ revenues from these services exceed their audit revenue. It is a global trend that the NAS get developed rapidly, and is not the particular situation of some specific countries or accountancy companies.

The average global non audit revenue has been taking a half portion of total revenue.
 Auditing &Accounting Taxation Other services (consultancy services)
 1997 1993 1997 1993 1997 1993
Global average 50.3% 52.2% 20.6% 19.5% 29.1% 28.3%
Global Big 5 Average 41.8% 48.8% 19.5% 19.3% 38.8% 32.0%
Global non-big 5 average 53.5% 53.6% 21.0% 19.5% 25.5% 26.9%
U.S. total Accountancy companies average 41.0% 47.4% 28.3% 30.7% 30.7% 21.9%
U.S. big 5 Average 34.5% 48.8% 20.7% 22.7% 44.8% 28.5%
U.S. non-big 5 43.0% 47.0% 30.7% 33.1% 26.4% 19.9%
European Big 5 average 47.3% 51.4% 22.3% 21.9% 30.4% 26.7%
European non-big five average 62.6% 59.6% 18.6% 19.0% 18.7% 21.4%
Asian non-big five average 58.3% 59.7% 18.6% 22.0% 23.1% 18.3%
Source form:  International Accounting Bulletin

On June 2000, the Panel of Audit Effectiveness was appointed by the Public Oversight Board (POB) to thoroughly examine the current audit model. As reported by the Panel of Audit Effectiveness, the revenue mix of the Big 5 firms has shifted toward consulting services. The growth of consulting services is illustrated by the following table, showing those firms’ mix of practice as a percentage of gross fees:

This indicates that, for SEC audit clients, the ratio of accounting and auditing revenues to consulting revenues dropped from approximately 6 to 1 in 1990 to 1.5 to 1 in 1999.
For 1999, 75% of the Big 5 firms’ SEC audit clients received no consulting services from their auditors, down from 80% in 1990. Four percent of those firms’ SEC audit clients had consulting fees that exceeded audit fees, up from one percent in 1990.

Similarly, the growth of consulting in the next three largest firms is shown below

NAS’s Impact on Audit Independence:
At the request of SEC Chairman Arthur Levitt, the POB appointed the eight-member Panel in 1998, arming it with a mandate to review and evaluate the way independent audits are performed and the effects of recent trends in auditing on the public interest. The Panel concluded as’ the Panel is not aware of any instances of NASs having caused or contributed to an audit failure or the actual loss of auditor independence.’ ‘Our Panel on Audit Effectiveness emphasized that difficulty in late May of 2000 when we issued and Exposure Draft Report that identified no such evidence, even after we examined a large sample of audits.’#p#分页标题#e#
Moreover, the panel reported that ‘The evolution of specialty skills into consulting practices was a logical extension of services as firms began hiring specialists for audit support. Expanding the scope of the specialists’ activities helped firms attract and retain people with skills that were increasingly important to effective auditing. Providing services beyond the audit were profitable; it also led to increased overall knowledge of the client’s business.’ This is the evidence to disprove Levitt’s opinion that NAS are only the products of accountancy companies’ profit seeking tendency. In fact, NAS can enhance the performance of an audit.
 
As Palmrose and Saul (2003) stated, ‘our panel’s report noted that, in about 25 percent of the engagements in which audit firms provided both audit and NAS, the NAS had a positive impact on the effectiveness of the audits.’ They continued to state that, under certain circumstances, NAS improved audit effectiveness. And it is very important to recognize the importance of attracting a staff of non-auditors to provide those services. ‘What was missing from the commission’s proposal was an understanding of how American business now depends upon systems using information technology (IT) to manage and control their complex globalized activities. To audit the systems requires the help of specialists in it and other areas. The auditing firm is often in the best position to supply a NAS that, in the words of our report, “facilitates the performance of an audit, improves the client’s financial reporting process, or is otherwise in the public interest.” There was nothing but lip service given in the commission’ s proposal to the reality that revolutionary changes in the infrastructure of American business have required changes in the way audits are conducted. In our view, the sec missed an opportunity to educate the investing public about such changes.’

Finally, it should be pointed out that some firms that have separated their consulting units from their auditing services have had to rebuild consulting capability within the restructured auditing firms. Having audit support staffs with specialized expertise is critical to audit effectiveness. That expertise, whether for recurring or nonrecurring audit support, often resides with NAS personnel. When faced with the costs, inefficiencies, and quality concerns of outsourcing essential audit support, some firms have elected to rebuild their consulting capabilities.

To conclude, NAS will not compromise audits. By contrast, it can enhance the performance of an audit in some circumstances.

Suggestions and Conclusion
By analyzing the Enron and Zhongtianqin cases, the conclusion is that NAS will not compromise audit independence. Indeed, in some circumstances, NAS can enhance the performance of audit.

In the Zhongtianqin case, two significant problems of Chinese audit are identified. Firstly, the business risk approach has not been widely developed, and therefore the incidence of audit failures caused by the shortage of client’s business knowledge continues to climb. Secondly, there is no regulation defining to what extent the consultant’s relationship with the client are acceptable whilst the auditor can still be identified as independent.#p#分页标题#e#

To conclude, some suggestions are given below:
Promote the NAS in Chinese audit market. As illustrated above, NAS will enhance the audit work rather than impair the independence, the promotion of NAS will help to increase the Chinese audits’ quality and enhance the auditors’ performance. Furthermore, as a value added dimension, Provision of NAS will increase the compatibility of Chinese accountancy firms.
Clearer guidelines meanwhile are needed as to classifying what services should be banned and what should not.

Rotations: As the accountancy firms build a close relationship with their clients after a long-term business, the audit independence may be compromised in this context if they lose their objectives. In order to avoid the risk of independence impairment, it is necessary to rotate the auditor every certain number of years.

Enhancement of the regulation. As China has joined the WTO, there is a trend to a regulation convergence with international standards. The regulated market is essential to promote a more healthy and efficient market and thus enhance the confidence of both domestic and foreign investors.
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