Auditor Independence

Instructions to answer the assignment

1.Refer to APES when providing answer to question (a)

2.Your discussion in (a) should also refer to threats to independence and why.

3.You must answer the questions (a,b,c) in the context of the case and not a general discussion.

4.Marking the assignment will consider grammar, sentence construction, logical flow of arguments and also references.

5.Maximum word limit 1000 words. For (a) 600 words, (b) 200 words, (c) 200 words.

Over the last decade, a larger portion of the revenues of accounting firms is from consulting fees (non-audit services) than audit fees. It is argued the two services are incompatible because while providing consulting services auditors would be checking their own work. This type of situation has raised question on the auditor's independence. Below, is the case study of an accounting firm, MRF Partners, followed by three questions you are required to answer.

MRF Partners has offered consulting services along with traditional auditing servicesand discovered that consulting work was often more profitable. Auditors must be independent of their clients and consulting services involve compromising their independence. MRF Partners has two units, MRA LLP and MRC Consulting LLP.Mark was head of auditing for the last 10 years. In the winter of 2016, he headed MRA LLP that accounted for about 50% of the firm's fees. Mr. Mark campaign in all his meetings to inspire the auditors to sell to their clients services other than auditing service. Meanwhile, MRC Consulting LLP increased its fees significantly to $10 billion, representing more than 50% of MRF Partners' overall incomes and they had to provide support to MRA LLP for up to about $200 million a year. In 2017, MRC Consulting LLP decided to split off entirely and changed their name to CHEAT.

In 2018, reports showed that PRAN LTD paid MRA LLP $70 million of which $65 million are from consulting services. Gradually, consulting services took over and financial statement audit services became less profitable and less important to MRF Partners.

PRAN LTD brought a case against MRA LLP for not fully disclosing the financial position to investors. Until the start of the inquiries, MRA LLP destroyed some key audit working papers and some crucial documents related to the audit of PRAN LTD.

In August 2018, MRA LLP the court sentenced MRA LLP for destroying documents related to the audit of PRAN LTD. MRA LLP was disallowed to practice as auditors.

MRA LLP lost a number of key clients due to loss of confidence and many staff also left the firm. With market pressure and public reactions, this led to the collapse of MRA LLP. On 12 December 2018, the Court overturned MRA LLP conviction, due to faults in the jury instructions. By this time, it was too late for MRA LLP.

Required:

(a) Discuss why the provision of consulting services to an audit client may compromise the auditor's independence. (10 marks)

(b)List the safeguards that MRA Ltd might have employed to reduce the threat to an acceptable level. (5 marks)

(c) Explain how MRA Ltd failed to act according to the public interest principle. (5 marks)