The Relationship between Categories of Non‐Audit Services and Audit Fees: Evidence from UK Companies

Abstract

Using survey data we examine the relationship between various categories of non‐audit services and audit fees. Compared to previous research, we use a more refined classification of non‐audit services both for incumbent and non‐incumbent auditors, and control for the existence of an internal audit function and basis of disclosure. Our results suggest that the relationship between levels of audit fees and non‐audit services varies by category of non‐audit service. These results support explanations of the positive association between fees paid for non‐audit services and audit fees in terms either of client specific differences, e.g. organisational complexity, or of events giving rise to the purchase of more audit and non‐audit services rather than in terms of direct economic linkages between the cost functions for audit and non‐audit services. We speculate that the presence of another auditing firm at the client in a consulting capacity may exert competitive pressure on the fee for external audit.