CHAPTER ONE

1.1 Introduction
This chapter introduces the research study on the issue of whether the provision of non audit services by external auditors compromises their independence or enhances their quality of work. To begin with, the background of the study is presented, giving details of historical and economic information related to the study. Secondly, the problem statement contextualizes the problem and takes a critical view of the questions that need to be answered concerning whether the provision of non audit services by external auditors is beneficial or detrimental to independence. The third component of the introduction is the objective of the study. This section gives detail on the overall aim and targets that have been set for this study. ourthly, the significance of the study will inform about the importance or relevance of doing the research. The fact that not many studies of its kind have been conducted in !amibia is one of the issues presented in this section. "t is followed by the research questions, which are a number of questions, related to the topic that the study is intended to answer# for example, $%o non audit services affect investor judgement&'. The thesis statement comes next and it mainly gives the central idea of this study, it is followed by the key terms and definitions, assumptions and limitations.

1.2 Background of the study

(uditor)s independence is an essential characteristic of the audit process and lack of it can extremely affect the quality of the audit. "ndependence provides the users of financial information with reasonable level of assurance that the audit was conducted with the utmost objectivity and thus eliminating any bias. The "ndependent *egulatory +oard of (uditors) ,"*+(- .ode lists independence as one of its fundamental principles and it explains that, $/ractitioners, when undertaking a reporting assignment, should be independent in fact and in appearance. "ndependence is an essential quality, concomitant with integrity and objectivity, in a practitioner undertaking a reporting assignment.' ,/uttick et al, 0112-, explains further that, $"ndependence is a quality that enables a practitioner to apply unbiased judgment and objective consideration, to establish facts and arrive at an opinion or decision. To be recognized as independent, the practitioner must be free from any obligation to, or interest in the client, its management or owners.' ,/uttick et al, 0112-. 3napp, ,4256- also defines auditor independence as the ability to resist client pressure. Similarly, "ndependence Standards +oard ,"S+- ,0111- defined auditor independence as the7 $8 reedom from those pressures and other factors that compromise, or can reasonably be expected to compromise an auditors9 ability to realize unbiased audit decisions' ,(lleyne, 011:-. (uditors are professionals who are trained to understand the dynamics of businesses from an external perspective and their independent viewpoint can assist clients in solving many business problems that are often beyond their competencies ,www.icaew.com-. .lients therefore find it appropriate to solicit for help and engage the services of their auditors in areas beyond auditing of their books. ;iven the auditors role in improving organizational performance and serving as surety to users of accounting information, auditing should be the auditor)s primary service, but they have been providing non audit services ,!(S- in the recent past. The !(S often provided by
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auditors include accounting and bookkeeping services, internal audit services, management consultancy, taxation services, etc. The current debate regarding the extension of audit activities beyond audit is that it has become a growing concern that the provision of !(S by auditors may impact negatively on auditor)s independence. ;hosh and 3allapur ,011<- on the other hand state that $"t is controversial whether the provision of !(S impairs auditor)s independence, or it is economically efficient instead.' This view is supported by +eattie and earnley ,0110-, when they argued that $There is little support for the view that joint provision impairs independence in fact, however there is a reasonable consensus that joint provision adversely affects perceptions.' %avis and =ollie ,011>- state that, $The Securities ?xchange .ommission ,S?.- believes that !(S impair auditor)s independence because of the significant revenues generated from these services.' (uditor)s independence may be impaired because auditors may be hesitant to criticize the financial statements that they prepared and also because of the fear of loosing the fees they get from !(S. @ost audit firms in !amibia provide !(S to their audit clients. (udit firms all around the world defend themselves against criticism that provision of !(S impairs their independence, whereas some regulators argue that the !(S provisions impair auditor)s independence, Aenkins and 3rawczyk ,0111-.

1. Pro!"e# $tate#ent
This study is therefore intended to evaluate interrelated questions such as whether or not it is ethical for auditors to continue offering !(S to audit clients. Bhether !(S impairs auditor)s independence and quality of audit and whether !(S should be banned and what impact the consequences would have on clients and auditors. This is a pressing issue because, many believe that by providing !(S, auditors compromise their independence, while on the other hand it is perceived that receiving such services in addition to audit services, from the same firm, is a useful way to cutCdown on costs and obtain expert advice which can be beneficial to a company. The onCgoing debate on this issue was further accelerated after the demise of one of the largest firms in the world, ?!*D! which led to the enactment of the SarbanesC Dxley (ct in 0110. This legislation was passed to reCestablish the confidence that public investors had lost in financial statement reporting, which had been assured by auditors. The aim of the SarbanesCDxley (ct was stated as7 $To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.' ,/uttick E van ?sch, 011FThis legislation was the first of its kind to request that auditors in the Gnited States and worldwide to comply with setCout reporting requirements specifically dealing with companies which listed their shares on the Stock ?xchange. The legislation has been criticized as being too academic based on suspicions and not through vigorous investigation, experience or observation. The criticism goes on to say that there is no conclusive proof that the provision of !(S directly affects auditor independence and thus compromise the legitimacy of financial statements assured by auditors. "t further states that it fails to answer important questions such as7 $Bhat causes a company to seek !(S from its auditors&' and $=ow do economic bonds and social bonds between auditors and clients, affect the auditors independence&' ,He, 011<Page | 2

1.% O!&ecti'es of the $tudy

The study is intended to address the following interrelated objectives7 To educate users of financial information and auditors about the impact of !(S on audit work. To inform audit related policies and regulations on the potential threats to auditor independence by !(S. To ascertain the impact of the provision of !(S on auditors independence To examine whether there is a relationship between audit fees and auditor)s independence. To identify the different types of !(S and the extent which audit firms in !amibia provide these services to their clients. To ascertain whether !(S provided by audit firms have positive or negative effect on the independence of auditors.

1.( $ignificance of the $tudy

This study is worth the investigation because there has been no work in this field of study in !amibia and this is intended to fill in that gap. The study will increase knowledge and understanding of !(S provision and its effect on auditor)s independence and it will stimulate further research on threats to auditor)s independence and potential benefits of !(S provision in !amibia. The findings of this investigation could hopefully improve better independence environment, so that investors can once more fully rely on audited financial statements.

1.) Research *uestion

The controversy surrounding the provision of !(S by auditors is not new. The debate has been going on for several years and this study is intended to provide answers to the following questions7 C C C C C C C C C Bhat are the types of non audit services provided by audit firms& %o audit firms in !amibia take part in providing non audit services to their clients& %oes the industry believe that the provision of non audit services to audit clients impairs independence& Should non audit services be provided to clients by staff from a different department in the same audit firm or should the non audit services be provided by a separate firm altogether& Should auditors only be allowed to provide non audit services to non audit clients& Should audit firms and clients disclose audit fees and non audit fees separately in their financial statements& "f audit firms do indeed engage in non audit services, then what are their reasons for engagement in such practices& (re the recent cases of fraud in large companies around the world a result of auditors failing to be independent& Bhat does the word $independent' mean to the auditor or accountant on a professional level&

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1.+ ,ey ter#s and definitions

!on (udit Services ,!(S-7 Services provided by auditors to clients besides auditing their books. (uditors "ndependence7 The ability of the auditor to operate independently without influence by clients or any other party interested in the services auditors provide. SarbanesCDxley (ct7 (n (ct enacted by the GS Supreme .ourt in 0110 after the collapse of the ?!*D! .orporation and demise of (nderson (udit irm. The act is meant to regulate the operations of (uditors and businesses in general. ?!*D!7 The name of the .ompany that collapsed necessitating the enactment of the SarbanesCDxley (ct of 0110. "*+( .ode7 "ndependent *egulatory +oard of (uditors.

1.- .e"ineations and /i#itations

(s is the case with all research, this investigation is subject to certain limitations. Dwing to the relatively small sample size the interpretation and use of the findings must be done with caution. (gain due to the limited time at my disposal, my study will be limited to Bindhoek municipal area.

1.0 Conc"usion
The chapter flowed from the historical works done on this topic to explaining the problem statement, presenting the research objectives and questions and providing some definitions of key terms referred to in the study. Iastly, the limitations that the study is subject to were also explained. .hapter two, will focus on the various literary works conducted on topics that are similar or relate to the topic.

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CHAPTER T1O /iterature Re'ie2

2.1 Introduction
This section is intended to briefly review the literature on the impact of !(S on auditor independence, as well as ideas and arguments by previous researchers. Dne relevant theoretical framework that will be used to guide this research paper is $*ole .onflict Theory' used by (lleyne ,0110-. *ole conflict theory is based on the following assumptions7 the auditor is required to monitor the client9s financial statements and the public expects the auditor to faithfully carry out that role ,3oo and Sim, 4222-. The auditor has to serve two opposing interests, client companies and the general public ,*izzo et al, 42F1- and identified several role conflicts. irstly, there exists conflict between a particular role and the individual9s values J personCrole conflict. Secondly, there exists intraCsender role conflict, which concerns multiple roles being allocated to an individual. Thirdly, roleCoverload conflict is where many roles are imposed on the individual, considering his or her capacity to fulfill them in the light of available resources. ourthly, 3oo and Sim ,4222, p. 01F- further state that $8 interCsender role conflict appears through mutually opposing expectation of roles, conflicting policies and needs of others, and incompatible criteria.' The most important conflict for the auditor is the interCsender role conflict. This is where the auditor is expected to satisfy both the needs of the client management and the third party users. Third party users expect the auditor to find and report all problems with the financial statements while management wants the auditor to ignore financial statements manipulation ,3oo and Sim, 4222-. Thus, at times, the auditor needs to choose from these conflicting needs. The auditor9s role conflict may negatively impact the auditor9s independence and the ability to conduct a just audit ,Schultz, 42F>-. "f the auditor tries to be adamantly ethical in a situation of conflict, management may seek to replace himKher. (s a result, the auditor may buckle under management9s pressure, resulting in a compromise of auditor independence.

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Three major conflicts of interest, which worked against auditor independence, were advanced by ;oldman and +arlev ,42F>-. These include conflicts between auditors and firms, owners and managers, as well as conflict between the auditor9s economic motives and audit criteria. Thus, auditor independence may be compromised when conflicting interests arise as to what is the auditor9s role. "ndependence is critically important to an auditor as it is regarded as being one of the fundamental principles underlying the auditor9s work. The financial markets must have confidence in the integrity and objectivity of auditors. Bithout definite independence, audits have little value to the numerous consumers of audit information. *ecently, researchers, regulators and the public have been concerned about auditor independence in the current audit environment where severe audit failures like ?nron and Borld.om, have emerged. The SarbanesCDxley (ct has implemented measures to ensure that a company)s auditors remain skeptical of their client)s financial reporting. Title "" of the SarbanesCDxley (ct ,(uditor "ndependence- lists services that auditors may no longer provide to clients. The reason for this prohibition is that maintaining independence is critical during the process of auditing financial statements. "nvestors would not have the confidence to invest large amounts of money in the stock market without the honest opinions of independent auditors ,3leckner et al, 011>-. The rules of the (ct, issued on Aanuary 05, 011: make it very clear on areas of nonCaudit services that affect the auditors) independence if made available to an audit client7 C C C C C C C C C C C Bookkee3ing or other ser'ices re"ating to the accounting records or financia" state#ents of the audit c"ient. 4inancia" infor#ation syste#s design and i#3"e#entation. A33raisa" or 'a"uation ser'ices5 fairness o3inions5 or contri!ution6in6kind re3orts. Actuaria" ser'ices. Interna" audit outsourcing ser'ices. 7anage#ent functions. Hu#an resource ser'ices. Broker8dea"er5 in'est#ent ad'isor5 or in'est#ent !anking ser'ices. /ega" ser'ices. E93ert ser'ices unre"ated to the audit. Any other ser'ice that the Pu!"ic Co#3any Accounting O'ersight Board :PCAOB; deter#ines !y regu"ation to !e i#3er#issi!"e<.

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The (ct further requires that the following activities be adhered to7 1. Partner rotation. Audit 3artners are 3rohi!ited fro# 3ro'iding ser'ice to the sa#e audit c"ient for fi'e to se'en consecuti'e years5 de3ending on the 3artner=s ro"e in the engage#ent.

2. Conf"icts of interest. An accounting fir# is 3rohi!ited fro# auditing the financia" state#ents of a c"ient if key #e#!ers of #anage#ent 2ere on the audit engage#ent tea# 2ithin a one year 3eriod. . Prea33ro'a" re>uire#ents. Audit co##ittees #ust 3re6a33ro'e a"" ser'ices 3ro'ided !y their auditors. %. Enhanced financia" disc"osure. The act re>uires #ore co#3rehensi'e disc"osure in the financia" state#ents5 inc"uding off6!a"ance6sheet transactions. (. Partner co#3ensation. $ar!anes6O9"ey indicates that inde3endence sha"" !eco#e i#3aired if the audit 3artner=s co#3ensation is !ased on se""ing non6 audit engage#ents to the audit c"ient. ). Auditor re3orts to audit co##ittees. Auditors no2 #ust co##unicate certain #atters to audit co##ittees5 inc"uding accounting 3o"icies of the co#3any. ( concern expressed by 3leckner and Aackson ,011>- on the above requirements is that small companies may not have the resources to abide by many of the SarbanesCDxley requirements, especially those under section >1>, which requires public companies to include an internal control report to their annual filings indicating the following7 C C C An ackno2"edge#ent that it is the res3onsi!i"ity of #anage#ent to 3ut together and #aintain suita!"e interna" contro"s. A re'ie2 of the efficiency of interna" contro" structure and techni>ues for financia" re3orting. An attestation !y an e9terna" auditor on the assertions #ade !y #anage#ent in its e'a"uation of interna" contro"s.

2.2

Ty3es of NA$ Pro'ided !y Auditors to c"ients

(ccording to the "nstitute of .hartered (ccountants of ?ngland and Bales ,".(?B-, there are three categories of !(S. The first category is, services required by legislation or contract to be undertaken by the auditors of the business. These include, regulatory returns, for
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example returns to the inancial Services (uthority. They also include legal requirements to report on matters such as share issues for nonCcash consideration, expenditure for grant application purposes, etc. "n addition to that, they include contractual requirements, for example to report to lenders or vendors on net assets, covenant requirements, etc. The second category is services that it is most efficient for the auditors to provide because of their existing knowledge of the business, or because the information required is a result of the audit process. They include tax compliance, where most of the information derives from the financial records# and reports in acquisition or reorganisation situations where completion is necessary in a very short time. The third category deals with services that could be provided by numerous firms such as management consultancy, tax advice and human resources consultancy, etc. ,www.icaew.com=owever, while provision of nonCaudit services is on its foremost progress, ?nron, the biggest bankruptcy in (merican business in 0114, has exposed the problem of audit independence. The auditor providing both audit and nonCaudit services have been likened to the role of the coach and the referee at the same time. That led the promulgation of the wellC known SarbanesCDxley (ct of 0110, also called the L+usiness *evolution (ctL. The (ct focuses on the independence and prohibits (uditor from providing both audit and nonCaudit services to the same client as stipulated by the /ublic .ompany (ccounting Dversight +oard ,(D+-. ,.hien et al, 0116-.

2. Argu#ents to 'eto the 3ro'ision of NA$ !y auditors

The study takes a look at inCdepth literature of other scholars concerning the prohibition of provision of !(S by auditors. Bhen a company is unsuccessful, the quality of the audit comes under scrutiny. Typically, the accusation is that the practitioners have allowed inappropriate accounting treatments because their independence has been compromised. The loss of independence by an auditor is normally the result of the $familiarity threat', where the auditor becomes too close to the client# or because their neutrality is challenged by overC dependency on revenue from a single source. ,www.icaew.com-. or those who believe this view, the only solution is to prevent auditors from providing any !(S and solely performing audit services

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(s mentioned earlier, the collapse of large companies such as ?!*D! and BD*I%.D@ caused the implementation of the SarbanesCDxley (ct, whose aim is, to protect investors by improving the accuracy and reliability of corporate disclosures. The SarbanesCDxley (ct pioneered the imposing of legislative reporting requirements of the Securities ?xchange (ct in the Gnited States, of issuers whose securities are registered with the Securities and ?xchange .ommission and listed on national securities associations and to subsidiaries or affiliated entities of such companies wherever they may, operate, anywhere in the world ,/uttick et al, 011F-. Section >1> of the act significantly impacts the responsibilities of South (frican auditors of qualifying S?. registrants. This is inclusive of any auditors of those South (frican companies listed on any of the GS Securities ?xchanges or subsidiaries, branches or affiliates of such companies and GS companies with South (frican branches, affiliates or subsidiaries. The SarbanesCDxley (ct is significant because of the large number of South (frican firms currently in !amibia which are at the same time listed on the stock exchanges in the GS as well as the large number of GS subsidiaries situated in South (frica ,/uttick et al, 011F-. The code of conduct forbids auditors from providing !(S to audit clients where there is a threat to independence and there are no safeguards put in place to deal with those threats. "n such circumstances, the firm must resign as auditor or refuse to supply the !(S. (n example of a situation that is prohibited is the promotion of shares of audit clients ,www.icaew.com-. Secondly, under the auspices of the G3 .ombined .ode of corporate governance, the audit committee as representative of the shareholders is required to oversee the relationship with the auditors and keep the nature and extent of audit services under review. The audit committee must be satisfied that the independence and objectivity of the auditor are not compromised. (s a result, audit engagement partners who are responsible for a company)s audit must# disclose in writing to the audit committee, all relationships between the audit firm and the client that may be thought to bear on the firms independence and the objectivity of the audit engagement partner and staff and the related safeguards that are in place# and confirm that, in their professional judgment, the firm is independent and the objectivity of the audit engagement partner and audit staff is not impaired ,www.icaew.com-. Thirdly, the ethical code specifies that an audit appointment should not be accepted if the client provides, for whatever work, an unduly large proportion of a firm)s gross practice
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income. That approach limits the undue financial dependency on any client without unimportant restrictions on the balance between different types of income ,www.icaew.com-. The code also requests that shareholders themselves are able to assess the extent of nonCaudit services provided by auditors. The .ompanies (cts have for some years required the total amount on nonCaudit fees paid to auditors to be disclosed ,www.icaew.com-. The bond between the auditor and the client may impair both the actual and perceived auditor independence because the audit firm is unwilling to criticize the work done by its consultancy division for example, and the audit firm does not want to lose lucrative !(S and is, therefore, more reluctant to disagree with management)s interpretations of accounting matters. "n respect of the personal relationship, the greatest threat to auditor independence is a slow, gradual, almost casual erosion of their honest disinterestedness ,He, 011<-. Thus it is alleged that a personal relationship, to the extent of developing bonds of loyalty or emotive relationships, will consciously or subconsciously impact the auditor)s independence and objectivity. ollowing %efond et al. ,0110- and ;eiger and *aghunandan ,0110-, this study argues that the audit report is the final outcome of the audit process, and is the only external communication of what the auditor has done and concluded during the audit. The decision on what type of audit report to render to the client is the final cumulative audit decision, and is subject to a considerable amount of professional judgment and negotiation with the client. (s such, it captures the possible influence that close auditCclient relationships might have on the auditor)s professional judgment and their behaviour in the negotiation. "f the auditors sacrifice some of their independence when facing the clients they have been working with for a long time or the exCcolleagues from their former audit firms, this will be reflected by a reduced professional skepticism or a soft behaviour in audit conflict situation, leading to a lower propensity to issue a qualified audit opinion ,He, 011<-. "nvestors are more likely to invest more confidently, and pricing is likely to be more efficient, if investors) perceive that the auditors) client)s financial information is more reliable and auditor independence is not impaired ,%avis and =ollie, 011>-. @oreover, %avis) findings also suggest that financial markets are less efficient when greater levels of nonCaudit service fees are disclosed and that the relative level of nonCaudit service fees does impair auditors) objectivity in the investors) mind ,%avis, et al 011>-. The extant literature has explored issues related to nonCaudit services fees and market reactions. /rior research
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examining the effects of nonCaudit service fees generally find that although there are marketC based incentives for the auditors to remain independent, providing such services may actually impair auditor independence in appearance. @aterial levels of consulting fees, representing approximately 40M of the audit firm)s office revenues and client revenues, significantly affected financial statement users) perceptions and decisions ,%avis, et al 011>-. Specifically, loan officers perceived greater auditor independence and higher financial statement reliability to exist when the auditor received an immaterial level of fees ,i.e., less than 4M of revenuesfrom an audit client. SixtyCseven percent of the loan officers in the immaterial condition approved the loan as compared to only >6 percent of loan officers in the material condition. "n a subsequent study, %avis, et al 011> ,011>- also find similar results for financial analysts. Their results indicate that immaterial levels of consulting fees did not decrease investors) perceptions when compared to a control group in which the auditor received no consulting fees. !ew S?. proxy disclosure requirements reveal an average !(S fee to audit fee ratio of 011 percent , laming, 0110-. The significance of these !(S fees and advocacy issues they bring up, increase concerns about auditor independence and the investors) perceptions of the auditor and the financial statements themselves. Bhen graduate business students acting as investors, viewed financial information and audit fee disclosures about a firm, the perceptions of auditor independence, audit quality and attractiveness of the entity as an investment were negatively affected , laming, 0110"n reference to !(S, the S?. now requests that all public companies disclose, in their proxy statement, all fees paid to the external auditor, split into : sections7 audit fees, information technology service fees, and fees for other !(S. These new disclosures indicate an average !(S to audit fee ratio well above 011 percent ,Beil and Tannenbaum 0114# rankel et al. 0110# laming 0110-. @embers of the public accounting community have debated that these !(S fees do not affect independence ,Beil and Tannenbaum, 0114# laming 0110-, while earlier academic research investigating the effect that various !(S have on perceptions of auditor independence has reported varying results. *esults from prior experimentation and investigation reveal that by providing !(S there is a downturn in investors) judgements of auditor independence, audit quality, and the

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attractiveness of the firm as an investment, but not their auditor knowledge or financial statement reliability judgments. , laming, 0110rankel et al ,0114- show that !(S fees average over 0><M of audit fees for a crossCsection of publicly traded companies, while Beil and Tannenbaum ,0114- find a !(SKaudit fee ratio of almost :11M for a sample of standard and poor firms. Some theoretical work suggests that !(S could decrease auditor independence by providing economic incentives for an auditor to compromise with the client ,(ntle 425>-. Some archival research suggests that !(S impairs independence by finding that higher amount of !(S are in line with higher levels of discretionary accruals , rankel et al. 0114-, lower informativeness of income ,;ul and Tsui, 0114- and fewer qualified opinions ,Bines 422>-. +eeler and =unton ,0111- found experimentally that audit partners exhibited more subjective ways of making decisions in the presence of potential nonCaudit revenue. The S?. believes perceptions of the auditor)s independence have an effect on the confidence of investors in financial statements, and affect financial statement user)s decisions based on those statements ,S?. 0111-. The S?. considers that $an auditor is not independent if a reasonable investor, with knowledge of all relevant facts and circumstances, would conclude that the auditor is not capable of exercising objective and impartial judgment'. laming found that the fees received by auditors from their audit clients, especially large amounts revealed in new proxy disclosures, seem to create an economic bond between client and auditor that could tend to bias an auditor in favour of a client. (lso, the client advocacy role that the auditor assumes by providing !(S might reduce the auditor)s objectivity during the audit. This client advocacy role is in conflict with the public advocacy role the auditor is supposed to hold as an external auditor. urther findings from laming ,0110- indicate that perceptions of auditor independence were statistically significantly lower for the cases where the audit firm performed !(S in addition to audit services, compared to cases where only audit services were provided. This decrease in independence perception occurred even when the audit fees themselves were high, suggesting that it is the nature of !(S and not the fee amount that affects investors. (udit quality and investment attractiveness perceptions were also lower when the client)s auditors performed !(S.

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%avis et al. ,011>-, using the magnitude of discretionary accruals and the likelihood of meeting earnings benchmarks as evidence of biased financial statements, find that high fees for nonCaudit services significantly impair auditor independence and reduce the quality of earnings. They also find evidence of a negative association between the disclosure of nonC audit fees and share values. @any recent studies examine the association between !(S and auditor independence using different proxies for audit quality. /roxies include allegations of audit failure in litigation, propensity to issue going concern opinions, earnings quality or restatements.

2.% Argu#ents against the 3rohi!ition of NA$

(t a more fundamental level, an examination of past cases of audit failure which have led to the enforcing of regulatory or disciplinary penalties have shown that the provision of nonC audit services was not the cause of the audit failure, nor did it arise from undue dependency on audit fees. The problem as stated is not supported by evidence and appears to be based on biased impressions of challenges that may arise rather than fact ,www.icaew.com-. @ost studies fail to find that !(S or lengthy audit firm tenure leads to a reduced propensity of issuing a qualified audit report ,.arcello and !agy, 011>-, a higher level of discretionary accruals ,(shbaugh et al., 011:# .hung and 3allapur, 011:# @yers et al., 011:- and a higher frequency of annual report restatement ,3inney et al., 011:# *aghunandan, et al., 011:# @yers et al., 011>-. irst of all, unnecessarily restricting the provision of !(S would have an unintended, adverse effect on the underlying quality of the audit through restrictions in knowledge and skills ,www.icaew.com-. @any studies have dismissed the idea of prohibition of !(S as unsound. /rovision of !(S reduces audit costs to the client if such services can usually be provided by the same firm benefitting from cumulative audit knowledge. "t has become apparent that investors base their predictions on their belief of the level of auditor independence. @ore recent evidence by %opuch, et al. ,011:- reveals that disclosures of nonCaudit services reduced the precision of investors) beliefs of auditors) independence in fact when independence in appearance was inconsistent with independence in fact. This
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caused prices of assets to diverge more from their economic predictions in the inconsistent settings relative to the noCdisclosure and consistent settings, therefore causing low market efficiency. Thus, disclosure of fees for !(S could reduce the efficiency of capital markets if such disclosures result in investors forming incorrect assumptions of auditor independence in fact. urthermore, .hurch and Nhang ,011:- find that auditor lawsuits are more frequent when the auditor provides !(S, regardless of the fees generated from such services. (ccording to /almrose ,4222-, less than one percent of auditor related litigation disputes has !(S as part of the basis on which the lawsuits are founded. +onner and Iewis ,4221- discovered that experience and taskCspecific knowledge affected auditor performance more than general business knowledge or years of experience, indicating that the auditor may gain valuable knowledge by performing !(S. The S?. considered the issue of the auditor gaining knowledge and its effect. "f investors believe this knowledge spillover occurs, the auditor who performs the !(S might be perceived to be more knowledgeable and competent regarding their client, and more likely to detect an error in the system or in the financial information , laming, 0110-. laming ,0110-, conducted experiments about the types of !(S and arrived at conclusions which suggest that the disclosure or presence of information technology services reduce the severity some of the perceived audit quality, investment attractiveness rating, and financial statement reliability impairments created by !(S in general. urther investigation by laming ,0110-, interestingly suggested that when information

technology ,"T- was identified as part of the !(S, the decline in perceived audit quality and investment attractiveness did not occur. (lso, the drop in independence perceptions was smaller for !(S including "T than when all !(S were listed under an $other fees' heading. This unexpected finding, can possibly be explained by the fact that knowing the specific !(S performed mitigated the ambivalence of the $other' designation, which might have been believed to include suspicious services. +oth legislators and firms might find that interesting, when deciding on the extent of auditor fee information to require or provide voluntarily. These prior research results of the implications of nonCaudit service fees disclosures on users)

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perceptions of auditor independence and market outcomes are somewhat inconclusive, pointing towards the need for further research in this area.

2.( Conc"usion
The debate of the effect of provision of !(S to clients is still ongoing with pros and cons advanced by accounting scholars. "t is hoped that this study will come up with a solution to untangle the current impasse.

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CHAPTER THREE Research 7ethodo"ogy

.1 Introduction
This chapter is intended to show the exact research methods and the data collection techniques that were used in this study. The structure of methodology consists of the research design ,type of research, sampling, research instruments-, research population, sample population, and data collection and analyses. ( breakdown of the primary and secondary data used is also indicated.

.2 Research design
To achieve the research objectives# and provide tangible answers to the research questions, the qualitative study approach that uses a descriptive strategic approach described by %avid and Sutton, ,011>- is used. This approach involves gathering a large amount of information about a small number of people or organizations ,Ticehurst and Oeal, 0111-. "t is based on the theory that a complete and rounded comprehension of the organizational experiences and situations of a few individuals, however unrepresentative they may be, is of more substance than a limited understanding of a numerically greater representative group. "n addition to that, the quantitative approach is also used. This approach involves statistical analysis and depends on numerical evidence to draw conclusions. Dne of the best and most effective ways of analyzing the data collected from the quantitative approach is by using the computer ,Ticehurst and Oeal, 0111-. or the qualitative approach, the data can be derived from observation, informal and inCdepth interviewing and participant observation. Dn the other hand, methods of collecting data for the quantitative approach involve questionnaire surveys, observation and secondary sources. (s a result, face to face interviews supported by questionnaires were used to gather the primary data. There are a considerable number of advantages of using qualitative methods as compared to quantitative methods. These advantages arise mainly from the basic beliefs and theories of knowledge underlying qualitative research ,?asterbyCSmith, Thorpe and Iowe 4224# ;ummeson 4224# 3elly 4251-. Some of these advantages are7 C C C C C C Pualitative methods can be used for very limited studies as well as holistic studies that examine the entire situation Pualitative methods are useful in investigating personal changes over time Pualitative methods focus on people)s comprehension and translations rather than finding external causes or Qrules) for behaviour Pualitative methods aid the researcher in understanding and divulging the personal experiences of individuals which may be internal or external experiences Pualitative researchers can use a mixture of methods of execution and performance or even establish methods to provide a wide understanding of a social situation Pualitative research reports are normally presented in a narrative format rather than in a statistical manner, making it easier for readers not trained in statistics to comprehend and maintain interest in the topic

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Pualitative research allows the researcher to experience issues from a respondents perspective

The use of questionnaires is beneficial because it provides a standardized dataCgathering procedure and eliminates any form of bias. The interviews are also appropriate because obtaining a personal account from interviewees on the issues at hand improves the quality of the information gathered. The secondary data was gathered from books, journal articles, and internet search ,websites-.

. Research 3o3u"ation
The research population includes all the auditors from major audit firms in Bindhoek, namely /rice Baterhouse .oopers, ;rant and Thornton and 3/@;KS;(. Dther (uditors and (ccountants employed at various entities and who are not necessarily performing external auditing functions were included to broaden the views of the respondents. (uditors and (ccountants constituted the main population as information from the $horse)s own mouth' is more credible.

.% $a#3"e Po3u"ation
%ue to the confidential nature of the research topic, " was granted permission to engage with senior management at the three audit firms mentioned above, as well as senior management at +ank Bindhoek and .atholic (ids (ction. (s a result, there were eleven respondents.

.(. The research 3rocess

.(.1 Ad#inistration of >uestionnaires Some questionnaires were distributed to the research participants by hand delivery and the rest were eCmailed. or those respondents who were working against time, the use of eCmail ensured that they could answer the questions at a time when they were not under work pressure and therefore they could answer the questions clearly and honestly. This was also the benefit of delivering the questionnaire by personally and allowing the respondent a number of days within which they could complete the questionnaire. /articipants where informed to complete the questionnaire and then hand them to the personal assistant in their respective departments. The others were kindly requested to forward their responses at the earliest time possible. (s expected, some participants forgot to timely complete and submit their questionnaires. =owever, three of the respondents granted me an audience and completed the questionnaire in the format of an interview# this was helpful as it resulted in less time delay in terms of collecting the questionnaires. This process was also beneficial as they shared some relevant knowledge and contributed to the research by suggesting other ways of clarifying some questions which may have seemed ambiguous.

.(.2 Co""ection of >uestionnaire

Puestionnaires were distributed to the respondents who were willing to participate in the study and were collected by the researcher. The researcher collected the completed questionnaires from the respondents and at the time of collection, verification of unclear
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information in the questionnaire was done. The respondents who had problems understanding how to answer specific questions were also assisted in order to complete their questionnaires.

.(. .ata ana"ysis

The data collected through questionnaires will be analysed statistically and the results will be expressed with the aid of tables, graphs and charts for clarity. The questionnaire consisted of mainly closedCended questions, but there were some few openCended questions. The utilisation of openCended questions allowed for a free response in the respondent)s own words. The data obtained was gathered from people in the industry such as senior management at three audit firms, one bank and nonCgovernmental organization. This data reflects directly on the variables J provision of !(S and impact on auditor independence. The strength of such kind of data is that it reflects the beliefs of professionals and what they perceive to be the main issue behind alleged compromise of auditor independence.

.) Conc"usion
This chapter presented the research methodology and the research design of the study. The chapter discussed where the data was gathered from, the methods that were used for data collection and how the data of the study was obtained, presented and treated. The following chapter presents the findings and data analysis of the study.

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CHAPTER % 4IN.IN?$ AN. ANA/@$I$

%.1 Introduction
This chapter analyses the data collected from the information provided in the questionnaires. The data was collected from senior audit and accounting staff in /rice Baterhouse .oopers, 3/@;KS;(, ;rant and Thornton, +ank Bindhoek and .atholic (ids (ction. The data is presented in tabular format as well as graphs, and interpretations will be given beneath the numerical data.

%.2 4indings Re"ated to the Research *uestion

The following research questions have been addressed7

*uestion 1
1.1 1hich of the fo""o2ing Non Audit $er'ices :NA$; is 3erfor#ed !y your fir# to c"ientsA The findings on the !(S performed by firms are presented in Table >.4 and figure >.4 respectively. Ta!"e %.1B Res3onses on NA$ 3erfor#ed !y fir#s Ty3e of Non Audit $er'ice Percentage Percentage :@E$; :NO; 4 0 : > 6 < F 5 2 41 44 40 (ccounting Taxation (ctuarial "nternal audit (dvisory orensic +ookkeeping *isk .ompliance =uman *esources Iegal "nformation Technology Systems @anagement (uthority 5:.::M <<.<FM 1M 1M 5:.::M 1M 5:.::M 61M 4<.<FM 1M 1M 1M 4<.<FM ::.::M 411M 411M 4<.<FM 411M 4<.<FM 61M 5:.::M 411M 411M 411M Tota" Percentage 411M 411M 411M 411M 411M 411M 411M 411M 411M 411M 411M 411M

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4igure %.1B Res3onses on NA$ 3erfor#ed !y fir#s

The Table and graph indicate that 411M of the respondents do not perform actuarial services, internal audits, forensic services, legal services, information technology systems services or management authority services as part of non audit services. 5:.::M, a clear majority, perform accounting, advisory and bookkeeping services. (s for tax services, <<.<FM perform them as non audit services, although this percentage is not as great as that of those performing accounting services, it is still clear that majority perform tax as a non audit service. Bhen it comes to human resources, only 4<.<FM of the respondents said that they consider it as one of the non audit services they perform, indicating that the majority do not perform human resource services as a non audit service. "n terms of risk compliance, the respondents were split in half, with 61M admitting they perform it as a non audit service and the other 61M saying they do not. 1.2 1hich of the fo""o2ing ser'ices do you think i#3airs the auditor=s inde3endenceA The findings on the !(S that impair auditor)s independence are presented in Table >.0 and figure >.0 respectively. Ta!"e %.2B Res3onses on ty3es of ser'ices that i#3airs auditor=s inde3endence Ty3e of Non Audit $er'ice Percentage Percentage Tota" :@E$; :NO; Percentage 4 0 : > 6 < F 5 2
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(ccounting Taxation (ctuarial "nternal audit (dvisory orensic +ookkeeping *isk .ompliance =uman *esources

:F.6M 06M 06M :F.6M 06M 40.6M :F.6M 06M :F.6M

<0.6M F6M F6M <0.6M F6M 5F.6M <0.6M F6M <0.6M

411M 411M 411M 411M 411M 411M 411M 411M 411M

41 44 40

Iegal "nformation Technology Systems @anagement (uthority

:F.6M :F.6M :F.6M

<0.6M <0.6M <0.6M

411M 411M 411M

4igure %.2B Res3onses on ty3es of ser'ices that i#3airs auditor=s inde3endence

The Table and graph indicate that the majority of the respondents do not think any of the above services impair the auditor)s independence. Bhen it comes to accounting, internal audit, bookkeeping, human resources, legal, information technology systems and management authority, :F.6M agreed that they impair auditor)s independence, compared to the <0.6M who disagreed with that notion. "n terms of taxation, actuarial, advisory and risk compliance, at 06M, there were an even smaller percentage of people who thought that those services impaired auditor independence. 5F.6M of respondents, indicating a clear majority, believe that forensic services do not impair auditor)s independence at all.

*uestion 2
As audit engage#ent staff5 do you take 3art in 3ro'iding non audit ser'ices to your c"ientsA The findings on whether audit engagement staff, take part in providing !(S are presented in Table >.: and igure >.: below. Ta!"e %. B Res3onses on 2hether audit engage#ent staff5 take 3art in 3ro'iding NA$ Nu#!er of @E$ NO PERCENTA?E PERCENTA?E Res3ondents :@E$; :NO; < < 1 411M 1M 4igure %. B Res3onses on 2hether audit engage#ent staff5 take 3art in 3ro'iding NA$

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(s indicated above, six of the respondents participated in this question and they all admitted that they provide non audit services to clients. Therefore representing 411M.

*uestion
.o you think 3ro'ision of non audit ser'ices to audit c"ients i#3airs inde3endenceA The findings on whether the respondents think the provision of !(S to audit clients impairs independence are presented in Table >.> and igure >.>. Ta!"e %.%B Res3onses on 2hether NA$ to audit c"ients i#3airs inde3endence Nu#!er of @E$ NO PERCENTA?E PERCENTA?E Res3ondents :@E$; :NO; 44 > F :<.>M <:.<M 4igure %.%B Res3onses on 2hether NA$ to audit c"ients i#3airs inde3endence

The Table and graph confirm the results presented in the Table and graph in question 4.0. "n both cases, the majority of the respondents did not agree with the view that the provision of non audit services impairs auditor)s independence. They believe that it depends on the non audit service which is being performed and also proper implementation of effective risk management procedures. The minority ,:<.>M- however, felt that performing non audit services brings about a conflict of interest as in some cases the auditor will be subject to the selfCreview threat.

*uestion %
$hou"d non audit ser'ices !e 3ro'ided to c"ients !y staff fro# a different de3art#ent in the audit fir#A indings on whether !(S should be provided to clients by staff from a different department in the audit firm are presented in Table >.6 and igure >.6.
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Ta!"e %.(B Res3onses on 2hether NA$ shou"d !e 3ro'ided !y a se3arate de3art#ent in the audit fir# Nu#!er of @E$ NO PERCENTA?E PERCENTA?E Res3ondents :@E$; :NO; 44 2 0 54.5M 45.0M 4igure %.(B Res3onses on 2hether NA$ shou"d !e 3ro'ided !y a se3arate de3art#ent in the audit fir#

( significant majority of 54.5M feel that non audit services should be provided to clients by staff from a different department in the audit firm. Dnly 45.0M disagreed with that notion.

*uestion (
.o you agree 2ith the 'ie2 that5 Auditor=s inde3endence 2ou"d !e threatened if the 3ro'ision of non audit ser'ices to audit c"ients 2ere undertaken !y staff fro# different de3art#ents 2ithin the sa#e fir#A indings on whether respondents agree that auditor)s independence would be threatened if !(S were provided by a separate department are presented in Table >.< and igure >.<. Ta!"e %.)B Res3onses on 2hether auditor=s inde3endence 2ou"d !e threatened if NA$ 2ere 3ro'ided !y a se3arate de3art#ent. Nu#!er of @E$ NO PERCENTA?E PERCENTA?E Res3ondents :@E$; :NO; 44 : 5 0F.:M F0.FM 4igure %.)B Res3onses on 2hether auditor=s inde3endence 2ou"d !e threatened if NA$ 2ere 3ro'ided !y a se3arate de3art#ent.

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This Table as well as the graph confirm the response in question >, by stating that F0.FM, representing a significant majority, do not think that non audit services provided by a separate department in the audit firm will compromise auditor independence.

*uestion )
.o you think auditor inde3endence 2ou"d !e "ess threatened if 3ro'ision of non audit ser'ices to an audit c"ient is done !y a different audit fir#5 than if they are done !y a se3arate de3art#entA indings on whether auditor independence is less threatened if !(S is provided by a different audit firm as compared to a separate department# are presented in Table >.F and igure >.F. Ta!"e %.+B Res3onses on 2hether auditor inde3endence is "ess threatened if NA$ is 3ro'ided !y a different audit fir# as co#3ared to a se3arate de3art#ent Nu#!er of @E$ NO PERCENTA?E PERCENTA?E Res3ondents :@E$; :NO; 44 41 4 21.2M 2.4M 4igure %.+B Res3onses on 2hether auditor inde3endence is "ess threatened if NA$ is 3ro'ided !y a different audit fir# as co#3ared to a se3arate de3art#ent

21.2M of the respondents agree that it is better for non audit services to be performed by a different firm than a separate department in the same audit firm. 2.4M disagreed with this view.

*uestion +
.o you agree 2ith the 'ie2 that5 auditors shou"d on"y !e a""o2ed to 3ro'ide non audit ser'ices to non audit c"ientsA indings on whether auditors should only be allowed to provide !(S to non audit clients are presented in Table >.5 and igure >.5. Ta!"e %.-B Res3onses on 2hether auditors shou"d on"y !e a""o2ed to 3ro'ide NA$ to non audit c"ients Nu#!er of @E$ NO PERCENTA?E PERCENTA?E Res3ondents :@E$; :NO; 44 > F :<.>M <:.<M
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4igure %.-B Res3onses on 2hether auditors shou"d on"y !e a""o2ed to 3ro'ide NA$ to non audit c"ients

:<.>M of the respondents believe that auditors should only be allowed to provide nonCaudit services to nonCaudit clients, whereas <:.<M, representing the majority, believe that auditors providing nonCaudit services should not be restricted to providing them for nonCaudit clients exclusively. The minority supported their viewpoint by saying that it avoids conflict of interest and ensures independence of the auditor, whereas the majority cited that it is part of accounting practice to provide nonCaudit services, the !amibian business industry is not large enough to have only audit clients, auditors have the necessary expertise to perform the non audit services efficiently and with proper controls and risk management procedures in place, auditors should be allowed to perform non audit services without impairing independence.

*uestion $hou"d audit fir#s disc"ose audit fees and non6audit fees se3arate"y in the fir#=s financia" state#entsA indings on whether audit firms should disclose audit fees separate from nonCaudit fees are presented in Table >.2 and igure >.2. Ta!"e %.0B Res3onses on 2hether audit fir#s shou"d disc"ose audit fees se3arate fro# non6audit fees Nu#!er of @E$ NO PERCENTA?E PERCENTA?E Res3ondents :@E$; :NO; 44 41 4 21.2M 2.4M 4igure %.0B Res3onses on 2hether audit fir#s shou"d disc"ose audit fees se3arate fro# non6audit fees

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Dnly 2.4M of the respondents felt that audit firms should not disclose audit fees and non audit fees separately in the firm)s financial statements. The remaining 21.2M majority agreed that that is the way audit firms should disclose their fees.

*uestion 0
.o you think se3arate disc"osure of audit and non audit ser'ice fees in the c"ient=s financia" state#ents can reduce threats to auditor inde3endenceA indings on whether separate disclosure of audit and nonCaudit fees in the client)s financial statements can reduce threats to auditor independence are presented in Table >.41 and igure >.41. Ta!"e %.1CB Res3onses on 2hether se3arate disc"osure of audit and non6audit fees in the c"ient=s financia" state#ents can reduce threats to auditor inde3endence Nu#!er of @E$ NO PERCENTA?E PERCENTA?E Res3ondents :@E$; :NO; 44 2 0 54.5M 45.0M 4igure %.1CB Res3onses on 2hether se3arate disc"osure of audit and non6audit fees in the c"ient=s financia" state#ents can reduce threats to auditor inde3endence

The Table and graph indicate that 54.5M of the respondents agree that separate disclosure of audit and non audit fees in the client)s financial statements can reduce auditor independence. 45.0M disagreed with that view.

*uestion 1C
.o you agree 2ith the 'ie2 that5 auditor inde3endence can !e i#3aired if auditors are on"y a""o2ed to 3ro'ide non audit ser'ices to non audit c"ientsA indings on whether auditor independence can be impaired if auditors are only allowed to provide nonCaudit services to nonCaudit clients are presented in Table >.44 and igure >.44. Ta!"e %.11B Res3onses on 2hether auditor inde3endence can !e i#3aired if auditors are on"y a""o2ed to 3ro'ide non6audit ser'ices to non6audit c"ients Nu#!er of @E$ NO PERCENTA?E PERCENTA?E Res3ondents :@E$; :NO; 44 : 5 0F.:M F0.FM

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4igure %.11B Res3onses on 2hether auditor inde3endence can !e i#3aired if auditors are on"y a""o2ed to 3ro'ide non6audit ser'ices to non6audit c"ients

rom Table >.44 and igure >.44 above it is evident that F0.FM of the participants felt that if auditors are only allowed to provide non audit services to non audit clients, their independence will not be impaired. ( minority of 0F.:M agreed that the auditor)s independence can be impaired.

*uestion 11
1hy do audit fir#s engage in non audit ser'icesA indings on the reasons why audit firms engage in !(S are presented in Table >.40 and igure >.40. Ta!"e %.12B Res3onses on the reasons 2hy audit fir#s engage in NA$ Reason Nu#!er of Tota" Res3ondents Percentage Res3ondents 2ho agreed i. !on audit 6 5 <0.6M services are part of normal audit business ii. (udit 4 5 40.6M services in the country are not enough to sustain the firms iii. +oth i and 4 5 40.6M ii, above. iv. Dther 4 5 40.6M 4igure %.12B Res3onses on the reasons 2hy audit fir#s engage in NA$

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There were eight respondents for this question and <0.6M agreed with the view that non audit services are part of normal audit business. 40.6M felt that audit services in !amibia are not enough to sustain the firms. (nother 40.6M of the respondents felt that the reason why non audit services are provided by audit firms is not only because audit services in !amibia are not enough to sustain the firms but also because non audit services are part of normal audit business. The remaining 40.6M of respondents simply felt that auditors have the necessary expertise to do all the work pertaining to all aspects of non audit services.

*uestion 12
Be"o2 are a "ist of non audit ser'ices5 3"ease indicate 2hich ones you consider as threats to your inde3endence. indings on which !(S auditors consider as threats to their independence are presented in Table >.4: and igure >.4:. Ta!"e %.1 B Res3onses on 2hich NA$ auditors consider as threats to their inde3endence. Ty3e of non audit ser'ice Nu#!er of Threat Not a threat res3ondents 4 0 : > 6 < F 5 2 (ccounting Taxation (ctuarial "nternal audit (dvisory orensic +ookkeeping *isk .ompliance =uman *esources < < < < < < < < < : ,61M0 ,::.:M0 ,::.:M: ,61M: ,61M4 ,4<.FM: ,61M1 ,1M0 ,::.:M: ,61M> ,<<.FM> ,<<.FM: ,61M: ,61M6 ,5:.:M: ,61M< ,411M> ,<<.FM-

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41 44 40

Iegal "nformation Technology Systems @anagement (uthority

< < <

0 ,::.:M4 ,4<.FM> ,<<.FM-

> ,<<.FM6 ,5:.:M0 ,::.:M-

4igure %.1 B Res3onses on 2hich NA$ auditors consider as threats to their inde3endence.

There were a total of six respondents to this question as the nature of the question made it solely applicable to external auditors. 61M of them consider accounting, internal audit, advisory and bookkeeping as threats to auditor independence, whereas the other 61M disagree. "n terms of taxation, actuarial, human resources and legal services, a majority of <<.FM do not believe that those services are threats, leaving a minority of ::.:M disagreeing with them. orensic and information technology systems are not considered as threats and this is evident from the 5:.:M compared to the 4<.FM who believe those services are threats. Bhen it came to management authority, a majority of <<.FM see it as a service that poses a threat to auditor)s independence. inally, as far as risk compliance is concerned, non of the auditors consider it as a threat to independence and that view is clearly evident from the table, where 411M of the respondents felt that risk compliance is not a threat.

*uestion 1
.o you think the recent cases of fraud !eing unco'ered in the 2or"d :Enron5 1or"dco#5 etc.; are due to auditors fai"ing to !e inde3endentA indings on whether recent cases of fraud being uncovered in the world ,?nron, Borld.om, etc.- are due to auditors failing to be independent are presented in Table >.4> and igure >.4> Ta!"e %.1%B Res3onses on 2hether recent cases of fraud !eing unco'ered in the 2or"d :Enron5 1or"dCo#5 etc.; are due to auditors fai"ing to !e inde3endent. Nu#!er of @E$ NO PERCENTA?E PERCENTA?E Res3ondents :@E$; :NO;
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44

F0.FM

0F.:M

4igure %.1%B Res3onses on 2hether recent cases of fraud !eing unco'ered in the 2or"d :Enron5 1or"dCo#5 etc.; are due to auditors fai"ing to !e inde3endent.

( majority of F0.FM of the respondents agreed that, recent cases of fraud being uncovered in major companies were as a result of auditors compromising their independence. Bith a 0F.:M minority disagreeing with this view, it is generally believed that impairment of auditor)s independence was a huge contributing factor to the demise of those major firms.

*uestion 1%
Bhat does the word independent mean to you on a professional level& E93"anation Nu#!er of 3eo3"e Tota" nu#!er 2ho agreed res3ondents 44 44 of Percentage 6>.6M 0F.:M

The auditor should < be objective. The auditor should : have no fear of being threatened in anyway after expressing his or her opinion. The auditor should 0 not only be independent in mind but independent in (//?(*(!.? as well.

44

45.0M

The respondents were requested to explain what the word $independence' means to them on a professional level. ( 6>.6M majority explained that it means that the auditor should maintain objectivity when performing his or her duties. 0F.:M believe that independence means, the auditor should be able to perform his or her work without being threatened in such
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a way that the validity of the audit work is questioned. Iastly 45.0M of the respondents felt that apart from the auditor being independent in mind, he or she should also be independent in appearance. "n other words he or she should be seen as independent and free from bias.

%. Conc"usion
The chapter related the findings of the questionnaire to the research question. The data was presented in tabular format and also with the aid of graphs. The opinions of auditors and accountants differ but they do not believe there is clear justification that non audit services are detrimental to auditor independence. They explained that with the right controls and risk management procedures in place, auditors should be allowed to perform non audit services without compromising their independence. The next chapter provides conclusions and summaries of each of the chapters that were presented in this study. "n addition to that, the researcher provides some recommendations that may be helpful in finding solutions for this study.

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CHAPTER ( CONC/D$ION$ AN. RECO77EN.ATION$

(.1 Introduction
This study investigated the provision of non audit services to audit clients by auditors, the impact on auditor)s independence and quality of work.

(.2 .iscussion of findings in re"ation to the research o!&ecti'es.

(.2.1 Educating users of financia" infor#ation and auditors a!out the i#3act of non audit ser'ices on audit 2ork. @ajority of the participants agreed that non audit services have an impact on audit work. =owever, most of them argued that non audit services do not have a negative impact on auditors work. There was a general consensus that auditors have the necessary expertise to perform the non audit services appropriately and with proper controls and risk management procedures implemented, the quality of work should not be negatively affected. "n a small country like !amibia, the audit firms cannot survive on solely providing audit services. (.2.2 Identifying the different ty3es of non audit ser'ices and the e9tent to 2hich audit fir#s in Na#i!ia 3ro'ide these ser'ices to c"ients. (s evident from the findings, some non audit services are provided by audit firms in !amibia and some are not provided at all. "n terms of actuarial services, internal audit, forensic, legal, information technology systems and management authority# firms in !amibia do not provide those services to clients that they audit. =owever, when the auditors were asked about accounting, taxation, advisory and bookkeeping, majority of them said that those services are provided. Bhen they were asked about risk compliance, their responses were split and so the findings displayed that 61M of the auditors provide non risk compliance and the other 61M do not. The range of respondents who felt that the non audit services provided do not impair auditor)s independence was from 5F.6M to <0.6M. That was an overwhelming majority and clearly indicates the auditor)s viewpoint on whether or not non audit services impair auditor independence. This is agreement with laming ,0110- who used information technology systems to illustrate that the provision of that non audit service did not reduce the perceived audit quality. The list of non audit services from which the auditors had to comment on is7 C (ccounting C Taxation C (ctuarial C "nternal audit C (dvisory C orensic C +ookkeeping C *isk .ompliance C =uman *esources C Iegal C "nformation Technology Systems
Page | 32

@anagement (uthority

(.2. Infor#ing 2hether there is a re"ationshi3 !et2een audit fees and auditor=s inde3endence. 21.2M of the respondents believe that audit firms should disclose audit fees and non audit service fees separately in their financial statements. "n addition to that 54.5M of the respondents believed that the client should also disclose audit fees separately from non audit service fees in order to reduce the threat to independence. These figures clearly indicate that there is a relationship between audit fees and auditor)s independence and therefore firms disclose the non audit service fees and audit fees separately in order to enhance independence by exercising transparency. (ccording to laming ,0110-, the perceptions of independence did not drop as much when non audit services were disclosed separately, as compared to when they were simply disclosed as part of other fees. The simple explanation is that the level of suspicion rises because the user of the financial statements may think that intricate details are being hidden. (.2.% Ascertaining 2hether non audit ser'ices 3ro'ided !y audit fir#s ha'e a 3ositi'e or negati'e effect on the inde3endence of auditors. @ajority ,<:.<M- of the respondents believe that nonCaudit services being provided do not have a negative effect on auditor)s independence. They gave reasons such as it depends on the nature of the non audit service being provided as well as having the appropriate controls and effective risk management procedures to combat any threat to the auditor)s independence. Those who disagreed with that view felt that by providing non audit services, auditors create a conflict of interest and therefore their independence is definitely compromised. (t :<.>M there were a significant few that will nonetheless continue this ongoing debate.

(. $u##ary of key conce3ts co'ered and 3ur3ose of each cha3ter

(. .1 Cha3ter one The introductory chapter looked at the issue at hand and the objectives that were to be achieved from this study. The chapter gave a background on the provision of non audit services and the relevant research questions that the findings were supposed to answer. 3ey terms and definitions were also provided in order to clarify any misconceptions related to meaning of ant terms used in the study. "n addition to that, the significance of the study was explained in order to justify the need for research on this specific topic. (. .2 Cha3ter t2o There was an abundance of literature related to the topic and this chapter is introduced with a section on the provision of no audit services in general and a discussion what other scholars have presented regarding the topic. The next section covered is the explanation of the different types of non audit services. The main part of the literature review chapter is based on the arguments to veto the provision of non audit services by auditors to their clients# versus arguments against the prohibition of non audit services. The purpose was to provide
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inCdepth information about the various arguments presented by scholars from around the globe and to observe whether the findings in chapter four relate to them. (. . Cha3ter three This is the research methodology chapter and the chapter explains how both qualitative and quantitative methods were used to conduct this research. They represented the primary data and entailed conducting interviews, distributing questionnaires and analysing the results. The secondary data were books, journals and the internet. (. .% Cha3ter four This chapter displays all the information obtained in tabular format as well as graphically. "t is clear that from the findings, most auditors and accountants in !amibia believe that the provision of non audit services by auditors does not impair their independence. =owever, there should be proper implementation of controls and risk management procedures to ensure that in the event of the auditor)s independence being compromised, necessary steps can be taken to prevent that from happening. The findings also indicated that the level of threat of a non audit service depends on the nature of the non audit service. Therefore in terms of the research question, $%oes !(S affect investor judgements&' or $Bhat is the impact of !(S on audit quality&', the findings indicate that the type of non audit service performed does indeed affect investor judgements but not merely the fact that a non audit service has been performed. (dditionally, majority of the auditors feel that non audit service has a positive impact on audit quality.

(.% Conc"usion
This study was aimed at uncovering the detail about the extent of non audit services provided by audit firms in the country. (fter studying the relevant literature and conducting experimental surveys on the industry in !amibia, the conclusion is that non audit services do not negatively affect auditor)s independence. (uditors clearly view certain non audit services as part and parcel of their audit work and therefore they do not consider them as threats to their independence. Dn the other hand, there are a number of non audit services that auditors do not provide to clients at all, although most of the auditors do not perceive those non audit services as impairments to their independence. "t is possible that there is another reason why they do not provide such services to clients# for instance, the auditors may lack the necessary expertise in the field in which the client requests aid. "n general, independence simply means that the auditor should be objective when performing his or her duties. "n conclusion, non audit services evidently have an impact on auditor)s independence and quality of work but with the right controls and risk management procedures in place, non audit services will not negatively affect the quality of audit work or the independence of the auditor.

(.( Reco##endations
(s a result of the findings discovered in this study, the following recommendations are made7 C (udit firms should ensure that a different department to the audit department provides the non audit services

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C C C C C

(ll audit firms should have proper controls in place and regular evaluations of whether the controls are still effective This study is limited to Bindhoek, therefore a nationwide study on the topic should be conducted as there will be a larger sample, which is more likely to lead to more accurate results The regulatory boards in the country should be stricter when it comes to clarifying which non audit services an audit firm is allowed to provide Smaller audit firms that may not have many departments should not provide nonC audit services to the clients that they audit @ore studies should be conducted on this topic from a !amibian point of view in order to clarify whether, all audit firms and their clients clearly disclose audit fees and non audit service fees separately in their financial statements

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ReferencesB
(lleyne, /. ,0110-. "ndependence of auditors7 in the deep end& ( +arbadian analysis, Journal of Eastern Caribbean Studies, Ool. 0F !o.0, pp.66CF2. (ntle, *. ,425>-. Auditor Independence. Aournal of (ccounting *esearch ,spring-7 4C01 (shbaugh, =., Ia ond, *., E @ayhew, +.B. ,011:-. %o !onCaudit Service .ompromise (uditor "ndependence& urther ?vidence. The Accounting Review. Ool. F5, "ss. :, pp. <44C <:2. +eattie, O. E earnley, S. ,011:-. (uditor "ndependence and !on (udit Services7 ( Iiterature *eview, Institute of Chartered Accountants in England and Wales, London, http7KKwww.icaew.co.ukKindex.cfm&(G+RT+0"S:<><:,@!T"S:<><: +easley, @., .arcello, A. E =ermanson, %. ,0111-. Should ou offer a !ob to our e"ternal auditor#, Aournal of .orporate (ccounting and inance, :, :6C>0 +eeler, A.%. E =unton, A.?. ,0111-. Contingent econo$ic rents% Insidious Threats to Auditor Independence& Borking paper. @illsaps .ollege and Gniversity of South lorida. +onner, S. E Iewis, +. ,4221-. 'eter$inants of Auditor E"pertise& Aournal of (ccounting *esearch .arcello, A.O., E !agy, (.I. ,011>-. Audit fir$ tenure and fraudulent financial reporting . Borking /aper, Gniversity of Tennessee. .hung, =. E 3allapur, S. ,011:-. Client i$portance, non(audit services, and abnor$al accruals. The (ccounting *eview, F5, >, 2:4C266 .hurch, +.3. E Nhang, /. ,011:-. "ndependence in (ppearance, !onC(uditing Services, and (uditor ee %isclosures. Borking /aper. ;eorgia "nstitute of Technology, (tlanta, ;eorgia and Gniversity of Toronto, Toronto, D!. %avis, S. @. E =ollie, %. H. ,011>-& An E"peri$ental Investigation of )on(Audit Service *ees and Investors+ ,erceptions of Auditor Independence% ,ost(Enron Era . /h% Thesis. ;eorgia State Gniversity. %opuch, !., 3ing, *. E Schwartz, *. ,011:-. "ndependence in appearance and in fact7 (n experimental investigation. Conte$porar Accounting Research. Ool. 01, "ss. 4# pp.F2C446. ,0114-. (n ?xperimental "nvestigation of *etention and *otation *equirements. Journal of Accounting Research. ,Aune-, Ool. :2, !o. 4# pp. 2:C44F. %e ond, @., *aghunandan, 3., E Subramanyam, 3.*. ,0110-. %o nonCaudit fees impair auditor independence& ?vidence from going concern and auditor opinions. Journal of Accounting Research ,September-# pp.40>FC40F>. ?asterbyCSmith, @., Thorpe, *. E Iowe, (. ,422:-. -anage$ent Research% An Introduction& Sage /ublications. Iondon.
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argher, !., Iee, =.H. E @ande, O. ,0116-. The effect of audit partner tenure on client $anagers+ accounting discretion. Borking paper. Gniversity of !ebraska erguson, @. A., Seow, ;. E Houng, %. ,011>-. )onaudit services and earnings $anage$ent% ./ evidence& .ontemporary (ccounting *esearch. 04, >, 54:C5>4 laming, I. ,0110-. 'o )on(Audit Services Affect Investor Judge$ents# rankel, *., Aohnson, @. E !elson, 3. ,0110-. The relation between auditors+ fees for non audit services and earnings $anage$ent. The (ccounting *eview FF, > ,supplement-7 F4C 416 ;eiger, @., E *aghunandan, 3. ,0110-. Auditor Tenure and Audit 0ualit . (uditing7 ( Aournal of /ractice and Theory, 04 ,@arch-7 45FC42< ;hosh, (. E @oon, %. ,0116-. 'oes Auditor Tenure I$pair Audit 0ualit # The (ccounting *eview. 51, 656C<40 ;hosh, (., 3allapur, S. E @oon, %. ,011<-. /rovision of !onC(udit Services by auditors7 ?conomic ?fficiency or @anagerial Dpportunism ;oldman, (. E +arlev, +. ,42F>-. The auditorCfirm conflict of interest7 its implications for independence. The Accounting Review. Dctober, pp. F1FCF45. ;ul, . E Tsui, A. ,4222-. -anage$ent Advisor Services, ,erceived Auditor 0ualit , and Infor$ativeness of Earnings. Borking paper. .ity Gniversity of =ong 3ong. ;ummesson, ?. ,4224-. 0ualitative -ethods in -anage$ent Research& Sage. !ewbury /ark. .alifornia =amilton A., *uddock, .., Stokes %. E Taylor, S. ,0116-. Audit partner rotation, earnings 1ualit and earnings conservatis$. Borking paper. Gniversity of !ew South Bales Aackson, *.%... E Stent, B.A. ,011F-. (uditing notes for South (frican students. <th ed. Aenkins, A.;. E 3rawczyk, 3. ,0111-. The relationship between non audit services and perceived auditor independence. Borking paper. !orth .arolina State Gniversity. 3elly, A.*. ,4251-. Leisure and 1ualit % 2e ond the 1uantitative barrier in research, in Recreation and Leisure% Issues in an Era of Change, eds T.I. ;oodale and /.(. Bitt, Oenture. State .ollege. /a. /p. :11C4> 3inney, B., /almrose, NCO. E Scholz, S. ,011:-. Auditor independence, non(audit services and earnings $anage$ent. The (ccounting *eview. FF, > ,supplement- 41FC44>. 3leckner, /.3. E Aackson, .. ,011>-. SarbanesCDxley and $Segregation of Services' 3napp, @... ,4256-. (udit conflict7 an empirical study of the perceived ability of auditors to resist management pressure. The Accounting Review. Ool. 4< !o.0, pp.010C44.

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3oo, ..@. E Sim, =.S. ,4222-. Dn the role conflict of auditors in 3orea. Accounting, Auditing 3 Accountabilit Journal. Ool. 40 !o.0, pp.01<C42. Iennox .., ,0116-. Audit 1ualit and e"ecutive officers+ affiliations with C,A fir$s . Aournal of (ccounting and ?conomics. :2, 014C0:4 @enon, 3. and Billiams, %. %. ,011>-. *or$er audit partners and abnor$al accruals. The (ccounting *eview. F2, >, 4126C4445 @yers, A., @ayer, I., /almrose, (. N. O. E Scholz, S. ,011>-. -andator auditor rotation% evidence fro$ restate$ents. Borking /aper. Gniversity of "llinois /almrose, (.N.O. ,4222-. ?mpirical research on auditor litigation7 .onsiderations and %ata. Sarasota. I. /uttick, ;. E van ?sch, S. ,011F-. The /rinciples and /ractice of (uditing. 2th ed. *aghunandan, 3. ,011:-. !onC(udit Services and Shareholder *atification of (uditors *eynolds, 3., %eis, %. E rancis, A. ,011>-. /rofessional Service ess and (uditor Dbjectivity. Auditing% A Journal of ,ractice 3 Theor . Ool. 0:C4# pp.02C60. *izzo, A.*., =ouse, *.A. E Iirtzman, S.". ,42F1-. *ole conflict and ambiguity in complex organization. Ad$inistrative Science 0uarterl . Ool. Aune pp.461C<:. Schultz, A.A. ,42F>-. The independent auditor and role conflict resolution, The Gniversity of Texas. Ticehurst, ;.B. E Oeal, (.A. ,0111-. 2usiness Research -ethods% A $anagerial approach& Beil, A. E Tannenbaum, A. ,0114-. +ig companies pay audit firms more for additional services. Ball Street Aournal Bines, ;. ,422>-. (uditor "ndependence, (udit Pualifications and the /rovision of !onC (udit Services7 ( note. (ccounting and inance. www.icaew.com ,0116-. Auditor Independence and )AS& Wor4ing ,aper Series no& 56 He, /. ,011<-. Threats to (uditor independence7 "mpact of nonCaudit service, tenure and alumni affiliation.

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APPEN.ICE$
A33endi9 1B Co'ering /etter for the *uestionnaire
@y name is Samuel +oamah. " am a final year student of +achelor of (ccounting at the Gniversity of !amibia. This questionnaire is part of a research project on the $/rovision of !on (udit services to audit clients J "mpact on (uditors) "ndependence and Puality of Bork'. The project is part of the requirements of the +. (ccounting qualification. " would therefore appreciate your assistance by answering this questionnaire as open as possible. =opefully this study will contribute to the ongoing debate on !(S and the findings untangle the debate further in smaller countries such as !amibia. " also assure you that any information provided as a consequence of this study will be treated with the necessary confidentiality it deserves. Thank you.

8888888888 S. +oamah ,*esearcher-

%ate7 CCCCCCCCCCCCCCCCC

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A33endi9 2B *DE$TIONNAIRE 4OR A RE$EARCH PROEECT

Non Audit $er'ices :NA$; *uestionnaireB Auditors
1. Which of the following Non Audit e!"ice# $NA % i# &e!fo!'ed () )ou! fi!' to client#* Plea#e tic+ $,% T@PE O4 NON AD.IT $ERFICE 4. (ccounting 0. Taxation :. (ctuarial >. "nternal audit 6. (dvisory <. orensic F. +ookkeeping 5. *isk compliance 2. =uman *esources 41. Iegal 44. "nformation technology systems 40. @anagement authority Bhich of the above services do you think impairs your independence& /lease tick. 0. (s audit engagement staff, do you also take part in providing non audit services to your audit clients& H?S !D :. %o you think provision of nonCaudit services to audit clients impairs independence& H?S !D PROFI$ION .OE$ IT A44ECT TO @ODR C/IENT$ IN.EP=CEA

;ive *easons for the above answer. 8888888888888888888888888888888888888 8888888888888888888888888888888888888

>. (re non audit services provided to clients by staff from a different department in your firm& H?S !D Page | 40

6. %o you agree with the statement that, (uditor)s independence would be threatened if the provision of non audit services to audit clients were undertaken by staff from different departments within the same firm& (;*?? %"S(;*?? <. %o you think auditor independence will be less threatened if provisions of non audit services to an audit client are done by a separate entity, than if they are done by a separate department& H?S !D F. %o you agree with the view that, (uditors should only be allowed to provide non audit services to non audit clients& (;*?? %"S(;*??

;ive *easons for the above answer. 8888888888888888888888888888888888888 8888888888888888888888888888888888888 5. %o you disclose audit fees and non audit service fees separately in the firm)s financial statements&
H?S !D 2. %o you think separate disclosure of audit and non audit services fees in the client)s financial statements can reduce threats to auditor independence& H?S !D 41. %o you agree with the view that, (uditor independence can be compromised if auditors are only allowed to provide non audit services to non audit clients& (;*?? %"S(;*?? 44. Bhy does your firm engage in non audit services&

i.
ii.

(udit services in the country are not enough to sustain the firms
!on audit services is part of our normal business

iii. (ny other reason7 8888888888888888888888888888888888888.

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8888888888888888888888888888888888888 8888888888888888888888888888888888888 8888888888888888888888888888888888888 8888888888888888888888888888888888888 40. +elow is a list of non audit services. Tick the services that you regard as threats to your independence.
T@PE O4 NON AD.IT $ERFICE 4. (ccounting 0. Taxation :. (ctuarial >. "nternal audit 6. (dvisory <. orensic F. +ookkeeping 5. *isk compliance 2. =uman *esources 41. Iegal 44. "nformation technology systems 40. @anagement authority THREAT

4:. %o you think the recent cases of fraud being uncovered in the world ,?nron, Borlddotcom, etc.- are due to auditors failing to be independent&
H?S !D

4>. Bhat does the word $independent' mean to you on a professional level& 8888888888888888888888888888888888888 8888888888888888888888888888888888888 8888888888888888888888888888888888888 8888888888888888888888888888888888888 Thank you for your time.

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