Since the stock market crash in 1929, the Securities and Exchange Commission has required publicly traded companies to have independent audits conducted on their financial statements. These independent audits are done by auditors chosen by the company. This arrangement has been likened to authors retaining their own book reviewers (Sternberg). In June 2000, The SEC proposed rule amendments regarding auditor independence. Can an accounting firm that performs consulting services for a company also conduct a fair and accurate audit on that same company? This is an issue that has been debated for years and, in light of the recent Enron bankruptcy, it is an issue currently under fire.
Arthur Anderson, one of the Big Five accounting firms, has been a major focus of these debates in recent months. Could the fact that in 2001, Enron paid Anderson "[ ] $25 million for audit services and $27 million for consulting services" (Sternberg) have anything to do with the alleged illegal actions faced by Anderson? When a company, such as Anderson, relies so much on non-auditing revenue, can their audits really be independent and free from conflicts of interest?.
For years, investors have relied on reviewing the financial statements of publicly traded companies to make an informed investment decision. These financial statements, required by the SEC, have been audited by independent auditors. The auditor's opinion of the financial statements serve as an assurance to potential and current investors that they are a true reflection of the company's financial position. If investors do not believe that the auditor is independent of the issuing company, they will hold little confidence and credibility in the financial statements. This could lead to a shortfall of investments.
In recent years, a dramatic increase in the revenues accounting firms have earned from consulting services has raised a red flag about auditor independence.