Restricting Non-Audit Services in Europe – The Potential (Lack of) Impact of a Blacklist and a Fee Cap on Auditor Independence and Audit Quality

Abstract

The European audit reform aims to stabilize financial markets by enhancing trust in the statutory audit. To strengthen auditor independence and to increase audit quality, the provision of non-audit services to audit clients is further restricted. The supranational introduction of a blacklist, including prohibited non-audit services, and of a cap on the volume of non-audit fees is a novelty on the European level. The purpose of this paper is threefold. First, we analyze these measures in light of both current national restrictions of non-audit services and auditor fee disclosure requirements in France, Germany and the UK. Second, we assess the potential impact of the cap on the volume of non-audit services by providing descriptive evidence on current fee levels in these three countries. Third, we critically assess the impact of the audit reform regarding non-audit services in light of audit research by analyzing the state of the art. On this basis, we doubt whether the European reform of auditor-provided non-audit services is effective and efficient. The main goal of enhancing perceived auditor independence and, thus, public trust in audited financial statements of public-interest entities may be hardly achieved and the blacklist might present a tradeoff between auditor independence and audit quality.