Abstract
The European audit reform of 2014 imposes, inter alia, a cap on the fees of non-audit services (NAS) for Public Interest Entities (PIEs). Prior academic findings do not provide consistent evidence that NAS impair auditor independence, and it is thus unclear whether a cap effectively enhances audit quality. Our study examines the impact of this cap on audit quality for listed PIEs across the EU from 2013 to 2018. We find that the cap decreased earnings management and increased audit fees for affected PIEs, i.e., those that exceeded the 70% cap before the reform, compared to unaffected PIEs. We document that the effect occurred immediately, persisted in 2017 and 2018, and was driven by companies with non-audit fees exceeding their audit fees before the reform. We further show that the improvement in audit quality post-regulation is generally more pronounced in the sample of Big 4 clients
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