Under new proxy disclosure rules, organizations must disclose separately fees paid to independent accountants for traditional audit services, financial information system design and implementation, and all other non-audit services. A review of proxies for components of the Dow Industrials discloses that non-audit services included: human resource consulting, litigation support, tax planning, due diligence reviews, evaluating the effects of accounting issues and changes in professional standards, statutory or regulatory audits, advisory services, operational consulting and non-information systems consulting.  The following worksheet shows that these non-audit services accounted for over 70% of each public accounting dollar spent by corporations, or nearly three times as much as that spent for traditional audit work.

 

The large amount spent for non-audit work, at the very least, raises legitimate questions about the impact on the accounting firms' independence when performing traditional audits. The recent debacle at Enron has brought this issue into sharp focus and the SEC and large investors such as the California Public Employers' System have taken steps to limit corporations' ability to retain their external auditor for other work.

 

Accordingly, now would be the right time for audit committees to examine the relationship between their organization and its external auditor. Questions to be asked include:

Reviewing the corporation's policies regarding the retention and use of external audit firms at this time may very well head off future problems. H.S. Grace & Co strongly recommends such action be taken either by knowledgeable board members or a firm experienced in corporate governance matters.

STEVEN B. LILIEN, Ph.D., a member of the Board of Advisors of Grace & Co. Consultancy, Inc. and a consultant on accounting and business operations, is Chairman of the Department of Accounting at Baruch College-CUNY, New York, New York.  H. STEPHEN GRACE JR., Ph.D. is President of Grace & Co. Consultancy, Inc., and JOHN E. HAUPERT is also a member of the Board of Advisors of Grace & Co. Consultancy, Inc. A consultant on corporate organization and financing, Mr. Haupert was Treasurer of The Port Authority of New York and New Jersey prior to retirement.