Dear Wendy,

You may want to check the following paper:

Do nonaudit services compromise auditor independence? Further evidence

H Ashbaugh, R LaFond, BW Mayhew - The Accounting Review, 2003 - aaajournals.org

Thank you, Ahmed, I will have a look at the article. :)

Regardless of the provision of non-audit services, through practitioner experience I have found audit independence is compromised through the over-use of junior audit personnel who are often learning on-the-job and who have not developed an independent mindset.  Supervisory auditors are often themselves only newly qualified.  Too often I see these guys listening to, and being duped by, more sophisticated management.  

Wendy, I suggest you take a look at the following researches, regarding skepticism:

The Way Forward on Professional Skepticism: Conceptualizing Professional Skepticism as an Attitude (Nolder & Kadous)

What Improves Auditors’ Assessments of the Risk of Intentional Misstatement?

While Prompts to be Skeptical Can Hurt, Auditor Wisdom Helps (Brewster, Peecher & Solomon)

Construal instructions and professional skepticism in evaluating

complex estimates (Rasso, AOS, 2015)

Thinking Fast versus Thinking Slow: The Effect on Auditor Skepticism (Wolfe, Christensen & Vandervelde)

From a practical point of view, please note that the non-rotation of audit partner as well as audit managers might be one of the main reasons for effects on auditor independence where partner and manager build a close relationship with the client management allowing more flexibility in dealing with misstatements in the financial statements based on subjective assessment of materiality. Also, audit fees may be another reason for effects on auditor independence, a matter which places pressure on auditor to maintain the stream of revenues and increase such fees with good relationship with the client management. The negotiation skills and subordination of auditor judgment to management requests for non-inclusion of remarks and comments in both the auditor's report and management letter.

I agree with the above, but add only one element: many cities in the US or counties do not pay enough for their audits, buying too little time to fully examine their books which may be in bad order.  they get what they pay for, a superficial job.

Irene

Many thanks to you Chris, Mohamed and Thiago for your valuable insights.  This particular case was inspired by senior partners, not junior staff, who interviewed executives in an organization and came away feeling very satisfied about the overall  integrity of these leaders.  The only problem here is that this directly contradicts the lived reality of followership. This is troubling, Yet most audit programs contain requirements to document how auditor professional distance was established and maintained, providing thereby more credence to conclusions audits may draw about  the 'control consciousness' of an organization. So I think in particular I will find the article Thinking Fast versus Thinking Slow: The Effect on Auditor Skepticism (Wolfe, Christensen & Vandervelde) very enlightening in this regard. 

Thank you, Irene, for getting to the point about the matter.  Given that in this the 5 year contract was awarded through a tender, and the lowest price was accepted, what you've noted may be a significant factor here. 

I believe the relationship between auditor's independence and non-audit services need to be investigated further due to its importance.

Dear Wendy,

In my view, professional skepticism is a state of mind. If you as an auditor see and recognize red flags, then you are doing it because you are skeptical. You may be skeptical through experience, through education or by your personality that made you choosing the job of the auditor in the first place. Hence, if you ignore red flags, if you pay no attention to them  - this will become a question of integrity, of independence and of being corrupted by money (audit fees), familiarity (being engaged for too long) or any other threats to auditor independence. Thus, we should be looking out for what makes a skeptical auditor suppress his questioning mind,  what makes him turn a blind eye despite a clear view of red flags.

Paul

Now that hits the nail on the head, Paul!  In fact, I think that would make a rather thought-provoking topic for research.  It does indeed appear that many of the problems associated with compromised professional distance are perhaps in fact symptoms of the mindset, that as you've noted, makes the skeptical auditor downplay those red flags. 

Thank you SO much!

In this regard, you may also want to check the following paper:

Auditor independence and non-audit services: A literature review (2002) by Beattie and Fearnley. Institute of Chartered Accountants 

This is definitely a very interesting topic for research. From a professional practice point of view the lack of understanding and interpreting both accounting and auditing standards is seen as an important factor for not applying proper professional skepticism. Also, the level of education and years of experience are other factors for PS. Moreover, inability of the auditor to understand the nature and environment of the clients, a matter which will result in the auditor allowing misstatements to exist without being investigated or the other way around.

Mohamed, Thank you so much for your response...you couldn't have more aptly describes the environment of a particular organization, and its niche I had in mind, when I posted the question. Your comment below is particularly poignant:

"...inability of the auditor to understand the nature and environment of the clients, a matter which will result in the auditor allowing misstatements to exist without being investigated or the other way around."

Perhaps part of this is inability, and part unwillingness, and therefore the turning of a blind eye to that which is damaging to the organization's moral fabric, but not necessarily culpable, and so not worth the loss of a lucrative contract to note or mention. 

Lot of press coverage on this in the Financial Publication in India. Someone should undertake serious research.

Please Go To This Link;

https://pcaobus.org/Standards/Auditing/Pages/AS1015.aspx

Thank you Wendy for your kind comment. I sincerely believe that when auditors maintain the quality of their services they can get a lot of work from clients who are interested to know their real financial position and results of operations.