The Provision of Non-Audit Services by Accounting Firms after the Enron Bankruptcy in the United States

This study aims to examine the current non-audit services after Enron, went bankrupt when massive accounting fraud was uncovered. We investigated 767 accounting firms in Taiwan and found that currently tax advisory service is the most popular the non-audit service provided by accounting firms. With a higher certified public accountant (CPA) to employee ratio, accounting firms will have better non-audit performance. Organization size is positively related to non-audit performance, while the independence of the accounting firm shows negative effect on non-audit performance. 1. Introduction The services of accounting firms have expanded and extended beyond traditional areas in 1980s. Traditional certified public accountant (CPA) market has come to its prime and saturation; the increasing number of CPAs has aroused severe competition in Taiwan. However, the internationalization of industry and complicated management policy encouraged the companies to have extra demands on CPA service. As Accounting Today in USA (2001, April) states, the income of accounting firms in 2000 showed that the proportion of international and national assurance service was 35%, whereas that of tax advisory service and management advisory service accounted for 21% and 44% respectively According to the data of the Ministry of Finance in Taiwan, R.O. C. , the income of non-audit service in 1992 grew from 157% to 212% in 2001. It shows that management advisory service has become the source of total income of accounting firms; in a sense, WAs are encouraged to launch into non-audit services. Non-audit services namely, information system planning, human resources, strategy and planning, investment and tax advisory, initial publication offer (IPO), investment in China and law advisory, could all be provided by accounting firms. Thus, regardless of their size, many firms dedicated themselves to non-audit services in order to gain competitive advantage in a saturated market. However, while provision of non-audit services is on its foremost progress, Enron, the biggest bankruptcy in American business in 2001, has exposed the problem of audit independence, where CPA provided both audit and non-audit services; in other words, CPA played the role of the coach and the referee at the same time. It has caused the American Senator Paul Sarbane to propose the well-known-Sarbanes-Oxley Act of 2002, also called the "Business Revolution Act". The Act came into effect on July 30. It focuses on the independence issue that, for the same client, CPA could not provide both audit and non-audit services as stipulated by the Public Company Accounting Oversight Board (AOB). This study aims to examine the current non-audit services in Taiwan, the effect of CPA independence on non-audit performance, and the future development of non-audit services in Taiwan after the bankruptcy of Enron. 2. Literature Review Non-audit services generally refer to the services above and beyond the related audit services or services other than traditional CPA work. Scholars in their studies use different terms for some relevant issues, namely, "Management Advisory Service" (MAS) and "Management Consulting Service" (MCS). While there is no particular restriction for the scope or classification of non-audit services, diverse classification methods have been employed by the researchers (Schemer and Kiger, 1982; Pany and Reckers, 1983). Purcell and Lifison (2003) defined non-audit services as traditional CPA works (including assurance, investment assurance, commerce registration and accounting affairs, and so on.). As well as, tax advisory service, management advisory service, finance and investment advisory service, and information technology advisory service. Firth (1997a) contends that the major source for the growing income in accounting firms is non-audit services, such as tax advisory, information systems design and implementation, management functions and human resources. …