The Importance of Partner Naming when Examining Auditor Independence and Non-Audit Services

Abstract

We examine whether the naming of partners provides a benefit to the public in the context of allowing researchers to empirically collect evidence on the economic importance of non-audit services (NAS) at the partner level. We provide evidence showing that auditor independence is impaired when auditors provide higher NAS using actual auditor provided NAS fees and the type and dollar value of those fees. Specific NAS are not banned and the identity of the audit engagement partner, NAS fees and description of the type and value of NAS from the audit firm are publicly disclosed in Australia. These data allow us to examine actual auditor provided NAS fees and type and dollar value of fees at the partner, office and firm level in an environment where NAS is not constrained by regulation. We find that higher NAS fee-based client importance is associated with fewer going concern opinions at the partner, office and firm level for distressed firms, and more earnings management at the partner level. In additional tests, we find that the observed associations are driven by non-tax NAS fee-based measures of client importance to the audit engagement partner. Hierarchical linear modelling analyses also show that reduced audit quality associated with higher NAS fees is mainly explained by partner, rather than firm and office level fees.