Abstract
We examine the effect on auditor independence of auditors providing non-audit services in the Norwegian audit market. We report the results of three tests of independence of mind and one test of independence in appearance. These tests find that there is a positive relationship between audit fees and non-audit fees, which does not suggest loss of independence. Further analysis using two-stage least squares shows that audit and non-audit fees are jointly determined, and the results are still not consistent with loss of independence. There is no relationship between the provision of non-audit services and the frequency with which auditors issue modified audit opinions. There is no association between non-audit services and audit tenure. Finally, we examine the relationship between unexpected or excess non-audit fees and cost of capital. There is no relationship. Our findings fail to find any evidence for loss of independence of mind or loss of independence of appearance as a result of providing non-audit services.
Highlights
Researchers, regulators, professionals and the public have paid considerable attention to the issue of auditor independence, especially after the commencement of the global financial crisis
The ratio of non-audit fees to the sum of non-audit fees plus audit fees declines over the period from 51.9 percent in 2008 to 48.9 percent in 2009 and 43.1 percent in 2010
The Norwegian sample companies pay substantially lower amounts for non-audit services than for audit services. This could be the result of the regulatory changes made in 2003 and 2005 in Norway that tightened the number of non-audit services that could be provided to audit clients
Summary
Researchers, regulators, professionals and the public have paid considerable attention to the issue of auditor independence, especially after the commencement of the global financial crisis. The Financial Supervisory Authority of Norway criticized audit firms for providing non-audit services to clients, and the changes of 2003 and 2005 reflect concerns regarding the auditor independence issue in Norway and are designed to reinforce auditor independence (Eilifsen & Knivsflå, 2013). There have been only a very small number of court cases against auditors in Norway–only 12 court cases were related to the audit report and annual statements between 1945 and 2005 (Hope & Langli, 2010)–it is still important for regulators and professionals to address the issue whether providing non-audit services might compromise auditor independence. Auditor independence continues to be an important issue in the European Union after the global financial crisis, and further restrictions on NAS are currently being implemented (Meuwissen, 2014)
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