Omar Tawfik 900060283 Case 7.

1. The results of the study indicate that auditors who receive a disproportionate amount in consulting fees become less independent. This can be attributed to the inappropriate reliance by such auditors on the non-audit fees, which creates a conflict between conducting a quality audit and attempting to please the client, as to not risk losing the consulting fees. This conflict will in most cases lead the auditor to conduct the audit without complete independence and integrity and as such the audited company will find it easier to meet their earnings targets.

2. When investors are aware that a conflict of interest exists between the auditor and a company, they realize the potential lack of independence by the auditor, which might lead to a poor quality audit and thus unreliable financial statements. This leads them to discounting earnings, which is simply to discount the value of items that increase the earnings of the company or by simply discounting the net income. The reasoning behind this is to reach what the investors perceive to be the more accurate financial position of a certain company, the position that would be reached by a completely independent auditor.

Investors are taking matters into their own hands, as the role performed by the external auditor is compromised, the role that guarantees to a certain extent the reliability of information in the financial statements. This highlights the importance of integrity and independence on the auditors part, as without them he cannot perform his role in the market and users of F/S are forced to estimate the true financial position of a company without relying on the auditors work.

3. Through Lowballing audit fees, the auditor is decreasing his income from auditing and increasing his income from non-audit fees from the same client. This serves to further the disproportionate over reliance on non-audit fees and thus weakens the auditors independence. As it creates a disparity in the relationship between the auditor and the client. Whether due to the auditors attempt to please or from pressure by the client, this position will almost certainly lead to a low quality audit, to save the major revenue source for the audit company.