This is a partial confirmation of suggestions that auditors might lean towards not giving entirely unbiased opinions when working for a paying client, according to an article on the cfo.com website.
The study was based on data collected during 13 years from 358 US audit firms.
Audits should basically provide useful information to anyone who uses financial statements. The auditing of financial statements fosters the credibility of the statements.
Good auditors become less attractive
Researchers focused on one essential service of auditors: flagging significant weaknesses in companies' internal controls over financial reporting. In the US this procedure is prescribed by the Sarbanes-Oxley Act (SOX). Auditors should identify significant weaknesses in situations where an audited company's control of its own finances is insufficient and there exists a real possibility that a serious financial misstatement might occur. However, auditors who do find such weaknesses are then perceived as less desirable in the audit market.
Lost fees and slower growth
And the result? Auditors become disincentivised and less willing to disclose information on poor internal controls on the part of their clients. The study found that when such information was rendered, the average fee in the following year increased by about 8% less than when no such information was rendered. There are usually also fees lost from clients with these poor controls because, perhaps unsurprisingly, they often react by going to another audit firm.
-jk-