The Effect of Nonaudit Services on the Pricing of Audit Services: Further Evidence

Abstract

Simunic [1984] examined effect of total management advisory services (MAS) fees on audit fees and found, the audit fees of clients who also purchase MAS from their auditors are significantly higher than audit fees of clients who do not do so [1984, p. 681]. Simunic interpreted this result as consistent with beneficial effects from joint supply of audit and MAS, as follows: . . observed relationship would arise if production of auditing generates knowledge useful in MAS production and/or production of MAS reduces marginal cost of auditing and audit demand is relatively elastic [1984, p. 698]. But he emphasized both preliminary nature of this result and need for further evidence. In this paper, I report results of a similar study of effects of fees for specific nonaudit services on pricing of audit services. I include all nonaudit services rendered by incumbent audit firm, categorizing these services as tax, accounting-related MAS, and nonaccounting MAS. This decomposition of MAS allowed me to investigate whether proximity of service to accounting influences existence and magnitude of any beneficial effects from joint supply. The motivation for considering these categories separately stems from distinction in independence literature between MAS that are related