The growing complexity in business requires greater expertise, consistency and diversity of skills among auditors. Multidisciplinary firms—those that offer audit and other services under the same brand name—meet this demand and add considerable value. But they are also the subject of scrutiny as regulators grapple with recent corporate failures and consider the relationship between the multidisciplinary-firm model and audit quality.
Crises can spark strong regulatory responses. That’s understandable. Responses, however, should be grounded in the facts. The International Federation of Accountants (IFAC), the Chartered Accountants of Australia and New Zealand (CA ANZ) and the Association of Chartered Certified Accountants (ACCA) recently published a report, “Audit Quality in a Multidisciplinary Firm: What the Evidence Shows”, to take on the issue.
So what’s driving this discussion, and what does the evidence show?
Supply and demand
The business case for multidisciplinary firms and their importance to the global economy becomes especially apparent when considering how critical technology is to modern enterprises. Data analytics, robotics, artificial intelligence—these emerging tools are essential to growth in many industries. Companies in those industries are, of course, hiring the experts they need to take advantage of those tools. External auditors need to have (or have at their disposal) expertise to match if they are to fulfill their mandate of giving reasonable assurances that financial statements for Information Age businesses are free of material misstatements.
That’s a tall order. Not only is the value that business creates becoming more complex and intangible, but accounting standards are changing rapidly. And this is the case even in more traditional industries.
Multidisciplinary firms have adapted to this environment by developing dynamic, new methodologies and frameworks to embed specialists in effective and efficient audits. They directly employ specialists: people with backgrounds in fields outside the accountancy profession, such as information technology and cybersecurity, suited to high-technology demands in audit and non-audit professional services. They are exceptional in attracting talent with these diverse skills.
The data show that the multidisciplinary-firm model lowers audit costs and improves audit quality. The availability of in-house experts to assist in complicated audits is quantifiably cost-effective: the United Kingdom’s Competition and Markets Authority (CMA) notes that audit firms rely on specialists for 10 to 20 percent of the value of an FTSE 350 Index audit. Audit-only firms—those that do not provide non-audit services—have to contract outside experts at significant cost.
Our report found that most peer-reviewed research on the subject shows an improvement in audit quality when a firm offers both audit and non-audit services, such as management consulting and actuarial services. The body of research attributes this trend to the sharing of expertise and systems. A range of factors improve audit quality—notably knowledge transfer, through which auditors benefit from the knowledge of specialists (and vice versa). Our report’s literature review, which covers the past few decades of research, suggests that the audit-only model precludes these positive spillover effects.
Whether recent corporate failures call for greater regulation of audit-service providers is the subject of deep discussion among professional accountants and regulators. Reviews led by Sir Donald Brydon and Sir John Kingman, as well as a study by the UK’s Competition and Markets Authority, are the most notable, and potentially consequential, developments. The facts should drive these discussions.
A piece in the International Business Research Journal found that the European Commission’s (EC’S) drive to regulate multidisciplinary firms has raised transaction costs but not audit quality. And a study in The Accounting Review found that the restrictions imposed by the United States’ Public Company Accounting Oversight Board (PCAOB) in 2005–2006 on tax advice had no effect on audit quality in terms of reported errors that caused financial restatements or flaws in filed tax returns.
The independence of auditors in firms that offer non-audit services to audit clients deserves careful consideration, but it is crucial to distinguish this issue from larger questions about the nature of multidisciplinary firms.
It’s also important to note that the International Code of Ethics for Professional Accountants, set by the International Ethics Standards Board for Accountants, includes a robust set of International Independence Standards that guide auditors on compliance with the principles of integrity and objectivity, as well as independence. The principles that underpin the Code of Ethics are at the foundation of professional accountancy. And these principles help accountants navigate conflicts of interest and ensure that their professional and business judgements are not compromised. Complying with these principles supports auditors in exercising professional skepticism, which helps with their critical assessment of audit evidence.
While a limited number of studies suggest that auditors act less independently when their firms provide non-audit services to audit clients, comprehensive regulatory regimes in many developed economies also serve to greatly mitigate this concern. Two prominent examples are the Sarbanes-Oxley Act in the United States, which imposes disclosure requirements and mandates audit-committee approval processes, and the prohibition by European regulators of some tax services, payroll services and the promotion of shares for the audited entity. And overall, the vast majority of non-audit fees for multidisciplinary firms come from non-audit clients.
The appearance of independence is as important as the reality of independence. But this concern may be overblown. A survey by the CA ANZ and the ACCA found that rules around non-audit services exceed what the public expects: for example, one-third of respondents thought audit firms should be allowed to provide audit clients certain advice on the accounting treatment of transactions or tax planning, despite regulations against these arrangements. Amid the larger discussion, auditor independence is a narrower question, worth considering as an issue regarding specific actions of multidisciplinary firms—not their existence.
The business case for the multidisciplinary-firm model of audit services—driven by demand and supported by data—is strong. Everyone wants high-quality audits. They underpin confidence in business and stability in financial markets. The performance of multidisciplinary firms shows a way forward as the accountancy profession steps into the Information Age.