Centre for Economic Policy Research

3.6
The multi-product audit firm and auditor independence
While solutions for controlling audit independence are currently focused on
restricting non-audit services, these remedies may be of limited help in our view
because they are unlikely to solve the core problems of incentives and perform-
ance measurement in the audit process itself. In most countries auditing firms
have been organized as partnerships with complex profit sharing rules and joint
and several liability for losses. Until the early 1980s, the firms’ managing partners,
Accounting: Conflicts of Interest in Auditing and Consulting 35
‘the issue of independence and objectivity is not resolved by a separation 
of audit and non-audit work – in fact, continuing to focus on that issue 
misses the point about dependency. It is not a question of what service is 
performed, but a question of what dependency or conflict is created and 
how best to address it and ensure the reliability of the information presented
to the public.’

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governance structure and profitability of the firms’ divisions was clearly 
dominated by the audit side. Power within the firms began to change, however,
as MAS activities and revenues grew dramatically with the growth in information
technology. Not only did the consulting business see high revenue growth and
high margins, but audit profits were under pressure at the same time. The profit
pressure came from both the revenue and cost side. Audit services became 
increasingly competitive causing fee reductions, at the same time as costs 
ballooned, especially as auditors became subject to growing litigation risk
(Palmrose, 1988 and 1991). Consulting partners began increasingly to question
why they should ‘share’ their profit growth with their audit partners, as the