Question

It appears that auditors (and tax professionals alike) are pressured or strongly influenced by their clients to overlook certain mistakes (whether intentional or not) in order to help their clients achieve the numbers they want or in the case of taxes, pay less taxes. The problem seems to lie in the inherent nature of the client service relationship between an auditor and a tax professional with their clients. Audit firms are compensated for their services by the very same people who they are supposed to audit. Yet, the auditors' loyalty are supposed to be with the public and not with their clients.

However, the clients are the ones paying the bills. In my opinion, many of the conflicts discussed in the cases we have evaluated thus far, arrive from this very set up.

1. Can you propose an alternate structure?

2. Who would bear the costs in terms of audit fees in this structure?

3. Are they any other costs/benefits with the current setup and the setup you are proposing? What obstacles would have to be overcome to achieve a better set-up?

Answer 1

(1).

When same client pay compensation to auditors and tax professionals then it is quite possible that services of these auditors and tax professionals will be influenced by the clients because due to monetary and non-monetary pressure from the clients these professionals shows favor towards their clients hence there should be some alternative structure.

We can set up a structure in which an independent body or government should take responsibility to pay compensation to the auditors and tax professionals because in this type of set up clients will not be in position to influence the work of auditors and tax professionals. As we know that government and independent body have power to collect taxes from the companies and firm so these body can collect a certain portions of revenues from the firms and companies which can be used for paying to auditors and tax professionals.

Under this independent set up these professionals can not be influenced by the clients because these clients will not be in position to pay compensation.

(2).

Ultimately clients will bear most of the costs because government or independent bodies will collect revenues from these firms & companies hence government will not face problem of costs.

(3).

Definitely there will be some problem like costs of set up this structure will be on government. Apart from this some more regulating work also will be on government because auditors & tax professionals will be compensated by the government then government will have to monitor performance of these professionals.

Normally we see that for every type of change there will be a resistence from the associated parties hence we will have to make them aware about the possible benefits from this new set up so that these associated parties can understand the overall benefits of this new set up.