The Economics Of Nonaudit Services

An attempt is made to provide an objective analysis of the economic incentives to and consequences of offering nonaudit services by the certified public accounting profession. The key to the issue is the appearance of auditor independence, regardless of whether there is in fact auditor independence from the client. Incentives to provide nonaudit services include: 1. growth opportunities, 2. personnel attraction and retention, 3. meeting clients' service needs, and 4. risk diversification opportunities. Disincentives include: 1. impact on audit demand, 2. diminished prestige, and 3. political ramifications. Alternative responses to the nonaudit service problem include: 1. Prohibit all nonaudit services. 2. Spin off the nonaudit service function into a separate entity. 3. Offer nonaudit services to nonaudit clients only. 4. Selectively prohibit services. 5. Have clients provide full disclosure in the financial statements of the types and amounts of nonaudit services purchased. 6. Do nothing.