Abstract:
Demand for auditing primarily stems from the intention of mitigating conflict of interest among
different stakeholders associated with a business entity. The external auditors act as a guarantor
of the reliability of the financial statements prepared by the management. Otherwise the
stakeholders who do not have adequate access to internal affairs and information of the business
may hesitate to make their investment decisions based on the information disclosed by the
management. Therefore, an opinion expressed by an independent external auditor adds
credibility to the financial statements. However, recent accounting scandals like Enron have
casted a doubt over the independence of auditors and the overall value of auditing. In Sri Lanka
as well, there have been few cases where the auditors' role and independence was challenged.
Auditor's independence may be impaired due to several causes. Amongst them, the provision pf
non-audit services to the client by the incumbent auditor has become one of the major causes
behind the diluted auditor independence. Therefore, this study investigated whether the
provision of non-audit services impairs the auditor's independence based on the data during
2008-2012 on 10 small and medium scale audit firms located in the western and southern
provinces in Sri Lanka. Interviewing and a questionnaire-based survey were used as main data
collection methods where the qualitative methods were used for analysis. Results revealed that
the provision of non-audit services results in self-interest, self-review, familiarity and intimidation
threats which eventually deteriorate the auditor independence of small and medium scale audit
firms. Therefore, the separation of non audit services from the incumbent auditor would result in
higher integrity of the financial statements.
