Non-audit Services Research Articles

The effect of non-audit services on audit quality

Audit quality (AQ) is value-relevant if the information is capable of making a difference in the decisions taken by various stakeholders. Therefore, the provision of non-audit services (NAS) to clients, and auditors can create economic bonding and self-review threats that compromise independence and AQ (Friedrich & Quick, 2023). The study investigates the effects of NAS on AQ in the Nigerian insurance industry. The ex-post facto research design was adopted and data were sourced from the annual reports of the 22 insurance companies listed on the Nigerian Exchange Group (NGX) between 2015 and 2020 and sampled through a filtering method. The study used descriptive statistics, correlation matrix, and binary regression techniques to test the formulated hypotheses. The study made use of a binary logistic econometric approach because the dependent variable is a dummy variable assuming the value of “1” and “0”. In agreement with the study of Pappert and Quick (2022), the regression results revealed that the provision of NAS, audit fees, and firm size significantly affect AQ in the Nigerian insurance industry, while auditor tenure had an insignificant effect on AQ. The study recommended that the provision of NAS should be strengthened and monitored to align with the list of services that auditors are not prohibited from rendering to the client.

The effect of auditor competence and independence on audit quality

The Public Accountant (auditor) profession is like a "double-edged sword", on the one hand auditors must pay attention to the credibility and ethics of the profession, but on the other hand they must also face pressure from clients in various decision-making. must face pressure from clients in various decision-making auditor's decision making. If the auditor is unable to resist pressure from clients such as personal, emotional or financial pressure, the auditor's independence will be compromised. personal, emotional or financial pressure, the auditor's independence has been reduced and can affect audit quality. and can affect audit quality. This study aims to analyze and prove empirical evidence of the effect of experience, knowledge, length of contact with clients, pressure from clients, peer review, and non-audit services provided by KAP on audit quality. provided by KAP on audit quality. The sample used was 79 respondents, namely auditors at 18 KAPs in Semarang City. Meanwhile, to answer the research hypothesis using multiple regression analysis tools analysis tool, after previously testing classical assumptions. Based on the results of the study, it can be concluded that experience in conducting audits, the knowledge of an auditor and the review of fellow auditors (peer review) have a positive effect on audit quality. So that the more deeper and broader the knowledge of an auditor and the more experienced in the field of auditing as well as peer review from fellow auditors (peer review). auditing field as well as peer review from fellow auditors, the better the audit quality will be. better the quality of the audit performed. Meanwhile, the length of the relationship with the client, pressure from clients, and non-audit services provided by KAP.

Auditor‐provided non‐audit services and perceived audit quality: Evidence from the cost of equity and debt capital

There is an ongoing debate among regulators and researchers about concerns that the provision of non‐audit services (NAS) to audit clients may impair audit quality by reduced independence. In this context, there can be different perspectives on audit quality. Given recent regulatory changes in the European Union (EU) aimed to improve investor confidence in audited financial statements, it is critical to understand the association of NAS and audit quality perceptions by investors before and after the regulation. We investigate whether NAS affect shareholder and lender perceptions of audit quality, measured by the cost of debt and equity capital. For a sample of German firms, we find significant positive associations of NAS with both cost of debt and cost of equity. Other assurance and consultancy services drive this effect. We do not find this effect in the pre‐regulation period, but in the transition period when the regulation was passed but NAS restriction did not yet apply. In the post‐regulation period, it only persists for lenders. Thus, the EU regulation may have increased (or inadequately created) independence concerns for shareholders and lenders and curbed these concerns for shareholders only.

The interdependence between market structure and the quality of audited reports: the case of non-audit services

This paper addresses the effects of a prohibition of providing non-audit services (NAS) to audit clients. By combining a strategic auditor–client game with a circular market-matching model that has an endogenous number of auditors, we take into account the interdependence between the auditors’ and clients’ incentives, the market structure, and the quality of audited reports. We show that the regulation’s effects depend on the preexisting audit market concentration and the types of blacklisted NAS. In sharp contrast to the effects that regulators desire, a prohibition of providing NAS to audit clients can further increase audit market concentration and decrease the quality of audited reports if the fees that auditors previously earned from providing the blacklisted NAS were relatively high, compared to the reduction in audit costs that result from spillovers. In contrast, a prohibition of the NAS that generate intense spillovers and low NAS fees can have the unexpected—but desired—effect of decreasing market concentration; however, reporting quality also decreases.

The audit market for listed Australian companies from 2012 to 2018: A state of play

Motivated by recent regulatory scrutiny of auditing in Australia, we provide an overview of the audit market for Australian listed companies from 2012 to 2018. Using descriptive analyses, we explore audit market competition, the provision of non-audit services (NAS), and audit firm tenure. We find that the Australian audit market is highly segmented. Big 4 firms increasingly dominate the larger client segment, while Non-Big 4 firms focus on medium and smaller clients. Auditor-provided NAS fees represent a relatively small fraction of audit fees for smaller clients, but a relatively high fraction for larger clients. We further observe that the share of total revenue from NAS of Big 4 firms increases over time. Finally, a relatively small percentage of clients has long audit firm tenure, and that long tenure is more common in the larger client segments. We discuss the implications of these findings and research opportunities that emerge. JEL Classification: D40, L11, M42, L84

Auditor choice and nonaudit fees: Evidence from group‐affiliated Indian firms

AbstractWe study the interplay between auditor as an instrument of corporate governance and the ownership structure of firms in the Indian context. Our study is motivated by the literature on agency problems occurring from both the conflicts of interests between owners and managers (Type I problem) and those between dominant and passive stockholders (Type II problems). Investors controlling Group‐affiliated firms have incentives and influence to monitor their firms, resulting in amelioration of Type I problems, which is expected to result in lower demand for high‐quality auditors. However, in situations where Type II problems dominate, the Group‐affiliated firms have incentives to, (i) mitigate conflicts with minority shareholders by using high‐quality auditors, and (ii) strengthen the perception that their auditors are independent. We find that Indian group‐affiliated firms tend to choose BigN auditing firms and that upon selection of a BigN auditor, there is no difference in the magnitude of nonaudit services purchased by both the Group‐affiliated and non‐Group‐affiliated firms, but when a non‐BigN auditor is chosen, the Group‐affiliated firms purchase significantly higher nonaudit services as compared to firms not affiliated to groups, suggesting that when Group‐affiliated firms select reputed auditors they also strive to maintain the perception that auditors are independent.

The Relationship Between Audit Services and Non-Audit Actuarial Services in the Auditor’s Report

Purpose: In view of the trend toward using international financial reporting standards when generating financial statements, we looked at the interaction between audit services and non-audit services for auditors in the context of actuarial services for insurance firms. CPAs are authorized to work in banks and insurance businesses, but those with a practicing license obtained after earning a higher academic degree are not.
 Design/methodology/approach: A small number of auditing firms control the decisions issued by the Iraqi Accountants Association, monopolizing audit services in banks and insurance businesses. In the case of actuarial services used in reserve estimation, they are credited to an external party's account without any verification of the Reliability of the reserve estimation procedure.
 Originality/value: In addition to audit services, a scale has been developed to examine the auditors' non-audit actuarial services. The financial reporting rules for insurance contracts 17 and the examinations for acquiring an actuarial certificate in the United States of America are used to create this scale.
 Findings: The findings show that there is no substantial relationship between the two services supplied, and we recommend that the actuarial services be audited by specialist international companies that support the auditors' judgment on the computation of expected reserves in the financial accounts. Conducting specialist courses in the actuarial profession, and obtaining this credential is a requirement for auditing insurance companies.

CORPORATE GOVERNANCE AND FRAUDULENT FINANCIAL REPORTING AMONG MALAYSIAN PUBLIC LISTED COMPANIES

Financial reporting is essential for the publicly listed companies as most of the company's stakeholder depended on the financial statement to make a business decision. Although many initiatives have implemented by relevant authorities to enhance financial reporting standards to overcome the fraudulent financial reporting (FFR). However, the issues still happening, for example, cases such as 1MBD, Lembaga Tabung Haji (LTH), Wirecard AG and British Home Stores (BHS). The paper aimed to investigate the impact of corporate governance (CG) attributes, namely audit committee size, board independence, multiple directorships, board size and non-audit services on FFR. This study is categorised as a crosssectional analysis, using a quantitative approach to gain an overview of fraudulent financial reporting. A total of 260 listed companies selected from Bursa Malaysia and the data was analysis used PLS-SEM. The findings revealed that the multiple directorships and non-audit service impact significantly related to FFR. This study made practical implications by helping the regulators, and accounting experts develop principles that help companies comply with financial reporting regulation. Accurately report the financials statement enhances stakeholder's knowledge in the decision-making process.

Can non-audit services from shared auditors in the supply chain mitigate the impact of the bullwhip effect on investment efficiency?

Amplified demand variability along the supply chain due to the bullwhip effect often leads to a mismatch between actual and planned demand. We study whether this demand distortion leads to less efficient investments for upstream suppliers than for downstream suppliers in the supply chain and whether this effect can be mitigated by non-audit services (NAS) provided by a shared auditor – an auditor that provides audit services to both a supplier and its major customer. Using a dataset of firms in different tiers of the supply chain, we find that suppliers farther upstream in the supply chain tend to have lower investment efficiency. However, upstream suppliers can mitigate this negative impact by purchasing NAS from a shared auditor in the supply chain. We find that the mitigating effect of NAS provided by a shared auditor is driven mainly by tax-related NAS, which is consistent with the notion that tax-related NAS improve investment efficiency by enhancing the design of business processes. Further supporting this interpretation, we show that upstream suppliers with a greater need for improved business processes, such as those with longer operating cycles and less bargaining power over customers, benefit more from purchasing tax-related NAS from a shared auditor. Overall, we identify a novel consequence of the bullwhip effect for the supply chain, namely reduced investment efficiency for upstream suppliers, and demonstrate that NAS provided by a shared auditor in the supply chain can mitigate this negative impact.

The Audit Regulatory Dilemma – Should Audit Regulatory Authorities Focus on Regulating the Audit Expectation Gap

Purpose: Audit failures around the world, have contributed to high-profile corporate scandals, severely impeding global economic growth. We investigate the extent to which the public trust, the public interest and the audit expectation gap, impact global financial stability and economic growth, contributing to understanding the purpose of external oversight over audit activities. These critical components of the audit environment, represent the essential elements necessary for regulating the global audit profession. Methodology: The proportion of revenue derived from audit services and non-audit services of the big four audit firms, is used as a proxy to measure the ‘audit expectation gap’. The resultant ‘audit expectation gap’ for the period 2005 to 2020, is juxtaposed against the global GDP growth for the same period, supporting the conceptual assertion that proper regulation of the audit expectation gap enables a stable financial environment, conducive for promoting economic growth. Findings: The study finds that the audit expectation gap increases during stable economic conditions, as illustrated by the reduction in the proportion of audit revenue to non-audit revenue, conversely reducing during volatile economic conditions. Originality/Value: This paper which uses the audit expectation gap as a proxy for the demand of audit services, contributes to understanding the dynamic relationship between the audit expectation gap and global economic growth, as well as the crucial role of external oversight over audit activities.

Non-audit services and auditor independence in stable and unstable economic conditions

PurposeThe purpose of this study is to examine the association between non-audit service fees provided by the auditor and auditor independence in stable and unstable economic conditions. Further, this study investigates whether client importance impairs auditor independence in two different Australian economic environments.Design/methodology/approachThis study focuses on financially distressed firms listed on the Australian Stock Exchange from 2005 to 2014. The data is obtained from SIRCA and the Morning Star databases. The probit method is used as a baseline regression model, the two-stage least squares and the sensitivity of control variable tests are used to control for any endogeneity and self-selection bias concerns.FindingsThis study shows that in stable economic conditions, non-audit service fees provided by auditors impair auditor independence. This suggests that economic bonding between auditor and client serves as a threat to the auditor’s independence, perhaps because of the importance given to the larger clients. In contrast, the authors find no association between non-audit service fees and auditor independence in unstable (highly regulated) economic conditions largely because of higher litigation risk. The results of this study are robust to alternative model specifications and endogeneity concerns.Practical implicationsThis study provides an important implication to regulators that macro-economic conditions influence the strength of incentives related to non-audit services for auditors. Furthermore, this study enhances the understanding of regulators (Australian Security Investment Commission) and the strategies adopted by Australian auditors in response to economic incentives and market-based incentives.Originality/valueThe authors contribute to the existing literature by providing evidence that there is a tradeoff between market-based incentives (i.e. lower litigation costs) and economic incentives (i.e. non-audit services fees) with economic uncertainty influencing the importance of these incentives to auditors.

Non-Audit Services and Audit Quality: Recent Evidence from Australia

Non-Audit Services and Audit Quality: Recent Evidence from Australia

Factors Affecting Audit Independence: A Case Study Based on the Failure of Typical Financial Fraud Audits

Audit independence constrains the work of auditors and provides certain guarantees for the quality of audit execution. Audit independence is affected by various factors, such as the development of non-audit services, the completeness of audit procedures, and the auditors' competence. This paper takes the typical audit failure cases such as the Enron incident, the Zhenlong audit failure, and the financial fraud audit of Kangmei Pharmaceutical as examples, and conducts a case analysis on the influence of different factors on audit independence in these audit failure cases. The conclusion shows that strengthening audit independence should be done by improving the service quality of firms, the professional competence of certified public accountants, the engagement mechanism and external supervision.

Potential Threats to Audit Firm Independence: Evidence from Italy on Audit Quality

Purpose – This study aims to investigate the potential threats to the independence of an auditor who provides both auditing and non-audit services (NAS), in terms of credibility of and confidence in audit quality.
 
 Design/methodology/approach – In this study, we first replicate the results of Campa and Donnelly (2016) using hand-collected publicly available data for a sample of 91 Italian manufacturing public companies audited by a Big 4 and non-Big 4 audit firm over a longer time horizon (2015˗2019) using the panel data approach, based on three interconnected regression models.
 
 Findings – Previous studies in this area did not find a unique interpretation of the association between auditor independence and provision of NAS. Our findings reveal that auditor independence, as measured by the magnitude of discretionary accruals, is compromised by the provision of NAS, especially when unexpected audit fees are lower than expected. Enhanced credibility can lead to greater confidence in audit value. This study’s results should be of interest to European and U.S. legislators, to improve financial reporting quality.
 
 Originality/value – In the wake of the global financial crisis and loss of confidence in the role of auditors, this study investigates the supposed threats, to to aim to enhance the credibility of and confidence in audit quality, especially in settings outside the Anglosphere. This study would contribute to the literature to support the more binding approach for audit firms.

The effect of non-audit fees and industry specialization on the prevalence and accuracy of auditor’s going-concern reporting decisions

The issue of auditors impairing their independence when providing non-audit services (NAS) to audit clients continues to be subject of global regulatory concern. However, the profession has long argued that knowledge gained from providing NAS can spill over to other areas and can serve to improve audit quality. Accordingly, we revisit the effect that NAS have on the likelihood of an auditor issuing a going concern modified opinion (GCMO) to distressed clients, as well as the accuracy of those opinions. We also examine whether industry specialization is associated with GCMO decisions and their accuracy. Our analysis of Australian company audits finds a significant negative association between auditors rendering a GCMO and the magnitude of NAS fees, and that increasing NAS fees are associated with fewer GCMO-related reporting misclassifications. Our analyses also find no strong evidence of an industry specialist auditor effect on GCMO reporting or report accuracy. In sum, our analysis of audit reporting decisions in Australia supports the concerns of regulators regarding reduced GCMOs when NAS fees increase, and also supports the contention of the accounting profession that providing NAS improves the quality of audit decision-making, leading to improved accuracy of GCMO reporting decisions.

Accounting firms’ employee satisfaction and audit fees

In this study, we examine whether audit fees are associated with job satisfaction among accounting firms’ employees. We use novel data obtained from social media site Glassdoor.com and find negative associations between audit fees and accounting firms’ job satisfaction. Our results are robust to alternative measures of employee satisfaction and correct for potential endogeneity problems using 2SLS regression models with instrumental variables (IVs), audit office fixed effects, and changes analysis. Our additional analysis reveals that compared to former employees’ ratings, current employees’ ratings play a more important role in determining the pricing of audit services. Moreover, audit fees are higher for firms audited by accounting firms with greater employee satisfaction and providing more nonaudit services. We further find that employee satisfaction at any audit level is associated with lower audit fees. Our study extends the extant literature on employee satisfaction and provides useful information for accounting firms regarding the importance of employee satisfaction to audit fees.

Auditors' Incentives and Audit Quality: Non-Audit Services versus Contingent Audit Fees

I develop a model that provides new insights into the consequences of the provision of non-audit services (NAS) by audit firms to audit clients. I also investigate the joint implications of NAS and contingent audit fees (CAF) for audit quality. In the model, litigation and reputation costs do not provide sufficient incentives to auditors to exert audit effort. Investors of client firms may therefore let auditors provide NAS because of an incentive effect. Indeed, the possibility of providing NAS contingent on detecting financial misstatements increases auditors' incentives to exert audit effort. However, the provision of NAS also reduces auditor independence, which may decrease audit quality and in turn render the provision of NAS by auditors undesirable. Thus my analysis uncovers an interesting tradeoff for regulators between the positive incentive effect and the decrease in auditor independence. Removing the current restrictions on CAF may offset the ex post decrease in audit quality while preserving the ex ante incentives. My analysis also generates a number of testable empirical predictions.

Stakeholders Perception of Public Sector Performance Audit

This study focused on evaluating public sector audit quality on public expenditure management in Nigeria. Qualitative and quantitative research was applied and data analysed using SPSS and NVivo 10. The F-statistics of 37.611, 27.644 and 27.218 explains the variations as adequate and significant at p <0.000. The R ratios of 0.621, 0.562 and 0.559 indicate significant influence of the audit quality on agencies’ expenditure management. The R-Square values of 0.385, 0.315 and 0.312 public expenditure management is influenced by audit quality. The study found significant relationship between audit qualities, agencies expenditure management, external influences on auditors that impair their independence and highlighted the absence of Audit Commission thus recommended the amendment of the Audit Act to promote yearly mandatory rendition of performance audit that addresses economy, efficiency and effectiveness (3Es) and standardized performance audit guidelines for presenting the audit reports that should be made available curtail non-audit service contracts from Agencies.

Differential spillover effects of different non-audit fees on audit report lag

PurposeRegulators treat all non-audit services the same by using a broad-brush approach which is reflected in the study of total non-audit fees in the same analyses or different non-audit fees in isolation by prior studies. To know whether the non-audit services have different effects and hence, should be regulated separately, this paper compares their effects on audit report lag and examines whether they follow the implied hierarchy of the Securities and Exchange Commission.Design/methodology/approachThe effects of audit-related non-audit fees, tax fees and other non-audit fees are compared in an audit report lag model to determine whether they are the same statistically. Supporting tests for audit quality use discretionary accruals and the reporting of a small profit or small positive change in profit.FindingsThis paper finds that different non-audit fees do not have the same effects on report lag and partial support for the implied hierarchy of the Commission. Specifically, for large accelerated filers, audit-related fees and tax fees have the same negative effects on report lag but other non-audit fees are unrelated to report lag. Tests of audit quality suggest that auditors do not compromise audit quality.Research limitations/implicationsDifferent non-audit services are unique in their spillover effects and deserve individual attention. Audit practitioners could be more comfortable in providing audit-related non-audit or tax services for audit clients since these services could facilitate audit work without compromising independence. On the other hand, they should be cautious about the provision of other non-audit services because the services do not enhance the efficiency of audit work and without such a benefit to audit clients, the provision may create issues of perceived independence.Practical implicationsInsight is limited by the types of disclosure of non-audit fees available and the lack of internal measures of audit efficiency.Originality/valueThe results provide deeper insight into the knowledge spillover theory and prior studies which implicitly assume all non-audit services having the same effect. The results suggest that the services should be regulated each on its own but not in a bundle. Last, this paper provides the first evidence that audit-related non-audit fees reduce report lag.

Corporate Governance and the Quality of Audit Process: An Exploratory Analysis Considering Internal Audit, Audit Committee and Board of Directors

This research aims to offer a better understanding concerning the relationships between Internal Corporate Governance Mechanisms and quality of the external audit process and what are the governance mechanisms that can influence some aspects of the quality of the external audit process. Semi-structured interviews were employed in order to get detail views of the external auditors to explain and clarify how the Internal Corporate Governance Mechanisms can influence the quality of the external audit process as well as offer a better understanding of the relationships between the governance mechanisms and the quality of the external audit process. Adopting this research design (exploratory) was mainly as a response to the recent calls as there is a lack of this kind of study that investigate the relationship between the Internal Corporate Governance Mechanisms can influence the quality of the external audit process. This research focuses on the perception/insight of the Jordanian external auditors regarding the influence of Internal Corporate Governance Mechanisms on quality of the external audit process. Thus, this study uses a sample of 206 Jordanian external auditors for the survey and 13 participants from this sample for the interview. The qualitative study employed the thematic analysis to analyse the interview data. The interview results highlighted that there are different ways and stages that the ICGMs can influence the EAQ, for example, through holding effective regular meeting, ensuring the auditor compliance with the audit requirements “regular monitoring”, discussing the initial and significant audit results “draft of discussion”, taking necessary follow-up actions “feedback” as well as requesting the auditor to conduct additional tests which can in turn enhance the EAQ. The results also suggest that ICGM can assist improving different aspects of EAQ such as the quality of the evidence that are collected by the ICGM and the valuable guidance from the ICGM to the external auditor. The communication between the ICGM and external auditor can be focused on different issues related to the audit process such as auditors’ findings, the effectiveness of internal control, scope limitations and material misstatements which allow improving the effectiveness of audit process. This indicates that, the auditor must be aware of the dynamic deciding of the role of particular mechanisms in improving the external audit process. The results have implications for the practitioners and regulators who are assessing the role of ICGM in improving the reliability of the financial report and auditor’s report. The empirical findings demonstrate that different ICGM can influence different aspects of the EAQ. More importantly, the results reveal that audit practice in Jordan is experiencing some difficulties in terms of the independence of the auditor especially, for the small local firms and providing non-audit service. In addition, there is no professional body for board of director; internal audit and audit committee like Jordanian association of certified public accountant (JACPA) for the external auditor, thus, responsibilities of these mechanisms need to be formally overseen by a higher authority. For the policymakers, this study offers a unique proposition to improve the effectiveness of the ICGM to achieve EAQ. These empirical findings of this study also highlight the importance of improving EAQ as a solution for the agency problems through reducing information asymmetry, improving the disclosure practice, level of confidence and assurance of the financial reporting as well as deterring the opportunistic behaviour from different parties. This research extended the existing empirical evidence that investigated the role of the internal governance mechanisms in the audit process.