Auditing and Consulting in Accounting Firms Research Paper

Auditing and Consulting in Accounting Firms - Research Paper Example The concept of moral hazard originated in the insurance business when the insured party exhibits immoral behavior by giving out wrong information, implying an outright fraud, but this definition has since been used in economics, in a situation where there is asymmetry in the information available. One party has more relevant information or data than the other party and is therefore in a better position to take action that will insulate itself from risks, while the other party unknowingly bears the negative consequences if things go wrong or not as expected. Previously, external auditing firms were hired for their accounting and auditing skills for expertise in these matters. However, the past few decades saw the rise of many independent smaller accounting firms, causing an intense rivalry or competition for new accounting clients. A response by the big global accounting and auditing firms was to branch out into a new service, in which they profess to have management expertise, and this is in the consultancy business. In the auditing market, there was saturation and maturity, hence accounting and auditing firms started to offer integrated auditing, consultancy, and advisory services (The Economist, 2012, p. 1). This situation has an inherent moral hazard in it, because accounting and auditing firms should not provide consultancy services to the same firms that they are auditing. There is a good tendency to manipulate the books (window dressing) to enhance assets, profits, or credit rating to justify the huge consultancy fees, which is a very lucrative revenue stream for these firms. Some regulators and policymakers have doubts whether it is possible to maintain accounting integrity or professional independence in these kind of situations. This is clearly an anomaly, similar to the fox guarding the chicken coop; it has been demonstrated by the corporate