Non-audit Services Research Articles

Independent and joint effects of audit partner tenure and non-audit fees on audit quality

We examine the individual and joint effects of auditors’ non-audit services (NAS)/abnormal NAS fees and length of audit partner tenure on audit quality. Our results raise questions about the ‘one size fits all’ approach imposed by the current audit partner rotation requirement in Australia as a result of (1) a learning differentiation that we observe between Big 4 and non-Big 4 auditors and (2) higher discretionary accruals associated with non-Big 4 auditors. We find abnormal NAS fees to have a positive association with both absolute and positive (income-increasing) values of discretionary accruals for firms with short audit partner tenure. NAS/abnormal NAS fees are also negatively associated with the issuance of going concern opinions to financially distressed firms when partner tenure is short. In terms of policy implications, regulators are able to gauge the efficacy of the CLERP 9 reforms which currently impose a five year mandatory audit partner rotation requirement.

Evaluation of Audit Expectation Gap in Sudan: Existence, Causes, and Subsequent Effects

Purpose: This study mainly focus on evaluating the existence, causes and subsequent effects of audit expectation gap in Sudan.Proposed Design/Methodology/Approach: A cross sectional research design in which data to be collected through structured questionnaires, and semi-structured interviews. Partial Least Square Path Modeling, using Smart PLS Software to analyze the data.Findings: A detailed literature review reveals that, there is a shortage of research concerning the impact of multi-responsibility auditor, standard external audit process, accounting and auditing regulations in a developing country, auditor independence in fact and in appearance, external audit rotation, and rendering of non-audit services on audit expectation gap.Moreover, there is dearth of studies investigating the moderating role of professional code of ethics, and the mediating effect of audit report .Therefore, the study proposes a framework to incorporate these factors into future research.Practical Implications: The results of this study will assist policy makers in finding ways that can be instituted to tackle expectation gap in Sudan, to improve the quality of the auditing profession in the country.Originality/value: This study contributes to the existing literature by adding evidence to the important debate about audit expectation gap, from a region that had little coverage on the studied matter. Specifically, it proposes a framework to extend the research on the factors that cause such a gap in Sudan. Moreover, a significant feature of this study is in introducing accounting and auditing regulations in a developing country as a new variable to investigate its effects on audit expectation gap.

DETERMINANTS OF AUDIT FEE AT PUBLIC ACCOUNTING FIRMS IN EAST JAVA

This study examines the determinants of audit fee at Public Accounting Firms (KAP) in East Java, Indonesia. The determinants tested in this study consist of audit size, complexity, audit risk, non-audit services, and internal control. Respondents in this study are external auditors at KAP. Based on the convenience sampling method, the total sample in this study amounted to 60 respondents. This research uses Structural Equation Model (SEM) with SmartPLS analysis tool. The results indicate that audit size has a significant positive effect on the audit fee. Meanwhile, complexity, audit risk, non-audit services, and internal control have no significant effect on the audit fee.

Auditor Independence, Current and Future NAS Fees and Audit Quality: Were European Regulators Right?

European Union adopted the Regulation (EU) No 537/2014, which in practice prohibits the joint provision of audit and most types of non-audit services (NAS). Regulators presume that NAS fees weaken auditor independence and, as a result, impair audit quality. As the evidence at the European level does not support this view, the question of whether the new regulation will enhance auditor independence remains open. We examine the association between future NAS fees and audit quality by distinguishing among tax, audit-related and other services. We base the analysis on a sample of Spanish listed companies for the period between 2005 and 2016, finding a consistent negative association between future other NAS fees and audit quality. This suggests that the expectation of future purchases of this type of NAS may impair auditor independence. Conversely, for tax and audit-related services results are not significant. Taken together, results suggest that European regulators should seek for further evidence before banning NAS, as some of them may in fact enhance audit quality.

PENGARUH IKATAN KEPENTINGAN KEUANGAN, PEMBERIAN JASA LAIN, AUDIT TENURE, PERSAINGAN KANTOR AKUNTAN PUBLIK DAN AUDIT FEE TERHADAP INDEPENDENSI PENAMPILAN AUDITOR

The purpose of this study was to examine the impact of the financial interest, non-audit services, audit tenure, competition between Public Accountant Firm, and audit fee toward auditor’s independency in appearance. The study was conducted using a survey method to provide the questionnaries to auditors in Public Accountant Firm. The data used in this study was primary data. The population of this study was auditors working at Public Accountant Firm. The sample of this study were auditors working at Public Accountant Firm in Jakarta and Tangerang which provides non-accounting services at least in one year of service and bachelor degree in level of education. There were 185 questionnaries distributed for this research, but only 134 questionnaries returned and 126 questionnaries used in this research using multiple linear regressions. The result of this study were (1) financial interest has no impact toward auditor’s independency in appearance, (2) non-audit services has no impact toward auditor’s independency in appearance,(3) audit tenure has no impact toward auditor’s independency in appearance, (4) competition between Public Accountant Firm has no impact toward auditor’s independency in appearance, (5) audit fee has significant impact toward auditor’s independency in appearance.

How Do Audit Offices Respond to Audit Fee Pressure? Evidence of Increased Focus on Nonaudit Services and their Impact on Audit Quality

ABSTRACTWe investigate whether audit offices respond to audit fee pressure by increasing their focus on nonaudit services (NAS), as well as the combined effect of audit fee pressure and an increased focus on NAS on audit quality. We find a positive association between audit fee pressure and changes in NAS at the audit office level. We also find increased rates of client misstatement among audit offices that increase focus on NAS in the presence of audit fee pressure compared to audit offices that do not, suggesting a joint effect on audit quality. We find that the reduction in audit quality occurs in large audit offices. Overall, we provide evidence that audit offices’ provision of additional NAS in the presence of fee pressure is an important dimension to consider when examining the effects of declining audit fees on audit quality.

An empirical analysis of audit pricing and auditor selection: evidence from India

PurposeThis paper aims to examine various factors affecting the pricing of audit services and the selection of auditors in the Indian audit market. This paper also aims to investigate the impact of financial distress conditions on the audit pricing and auditor choice decisions of a firm, particularly in the context of a developing economy.Design/methodology/approachThe sample comprises 22,644 firm-years for 1,366 Indian firms from 1990 to 2015. The authors adopt ordinary least squares regression technique to model audit fee, and logistic regression technique to model auditor choice as a function of various factors relating to firm attributes and auditor characteristics.FindingsThis paper finds that auditors tend to charge an audit fee premium when they are affiliated to a Big 4 auditor, have industry specialization or jointly provide auditing and non-auditing services. Additionally, firms with larger boards, higher proportion of independent board of directors and CEO–Chairman separation are more likely to choose a Big 4-affiliated auditor. The results also suggest that financially distressed firms tend to pay significantly lower audit fees and are more likely to choose non-Big 4 auditors.Originality/valueThis paper is among the few studies which investigate how financial distress impacts the audit pricing and auditor choice decisions of a firm in the context of emerging economies. The findings of this paper raises serious concerns about the credibility of the audited financial statements and corporate governance mechanisms of firms undergoing financial distress. The empirical results of this paper have strong implications for practitioners, regulators and investors.

The role of the audit committee in moderating the negative effect of non-audit services on earnings management among industrial firms listed on the Amman Stock Exchange

This paper examines the effectiveness of the audit committee in limiting the adverse effects of the provision of non-audit services (NAS) on earnings management. In addition, the current study examines the effect of surplus free cash flow and NAS on earnings management. Earnings management occurs less frequently when the audit committee is effective. In this study, audit committee effectiveness refers to the overall effectiveness of the committee that was measured using a composite measurement of effectiveness. The sample comprised 336 industrial firms listed on the Amman Stock Exchange from 2014 to 2016. The results documented that the positive relationship between surpluses free cash flow and earnings management. This study contributes to the literature by providing evidence that investors realise that NAS harms the independence of the auditor by creating an economic bond between the auditor and client that could negatively affect audit quality and hence earnings credibility. As does all research, this study suffers from limitations, including the fact that this study sheds the light only on the industrial sector in Jordan, Thus, the need exists for more research to be conducted using other sectors in Jordan and other countries as well to determine the effects of other variables on earnings management from other perspectives.

Do Non-audit Service Failures Impair Auditor Reputation? An Analysis of Multiple Scandals Surrounding KPMG Advisory Services in Germany

Non-audit services have become a major focus of the Big Four accounting firms. Failures in these services may impair the accounting firm’s reputation as an auditor. Along with short-term reputation effects, this may induce longer-term economic consequences and reactions by the accounting firm to counteract reputation losses. Accordingly, we analyze whether two events of observable non-audit service deficiencies of KPMG Germany impair KPMG’s reputation as an auditor in the short run. Considering longer-term consequences, we investigate KPMG’s ability to retain and gain clients, audit fees, and indicators of audit quality. With an event study, we find evidence for short-term negative market reactions to the average KPMG client. The follow-up analyses of a broad sample of German listed firms do not suggest that KPMG attracts less or loses more clients nor do we find a difference in their audit fees. However, we find indications of more aggressive earnings management by KPMG clients after the second event. Overall, we present evidence that, in a low-litigation setting, markets punish an audit firm for non-audit service failures in the short run, but longer-term economic consequences seem marginal.

The role of the audit committee in moderating the negative effect of non-audit services on earnings management among industrial firms listed on the Amman Stock Exchange

This paper examines the effectiveness of the audit committee in limiting the adverse effects of the provision of non-audit services (NAS) on earnings management. In addition, the current study examines the effect of surplus free cash flow and NAS on earnings management. Earnings management occurs less frequently when the audit committee is effective. In this study, audit committee effectiveness refers to the overall effectiveness of the committee that was measured using a composite measurement of effectiveness. The sample comprised 336 industrial firms listed on the Amman Stock Exchange from 2014 to 2016. The results documented that the positive relationship between surpluses free cash flow and earnings management. This study contributes to the literature by providing evidence that investors realise that NAS harms the independence of the auditor by creating an economic bond between the auditor and client that could negatively affect audit quality and hence earnings credibility. As does all research, this study suffers from limitations, including the fact that this study sheds the light only on the industrial sector in Jordan, Thus, the need exists for more research to be conducted using other sectors in Jordan and other countries as well to determine the effects of other variables on earnings management from other perspectives.

Independence of Statutory Auditor and Reliability of Financial Statements: Evidence from Listed Manufacturing Companies in Nigerian

This study examined the impact of the independence of statutory auditor on the reliability of financial statements of the manufacturing companies in Nigeria. The study adopted a survey research design, using data collected from a structured online questionnaires administered to the shareholders of listed companies in Nigeria. The population of the study comprised all shareholders in Nigerian listed companies, 150 structured questionnaires were randomly distributed from which 137 were retrieved from the respondents. The gathered data were analyzed using descriptive and inferential statistics. For unwavering quality, the Cronbach alpha was utilized to test the dependability of the instrument. The paper found that independence of statutory auditors had a positive significant effect on reliability of financial statements (RFS) (F= 9.018, Adj. R2 = 0.191, p < 0.05). Also that Non-financial interest (NFI) had a positive insignificant effect on RFS, AdjR2 = 0.195; F-Stat. = 9.255; P = 0.000. Audit tenure (AT) also had a positive significant effect on RFS, AdjR2 = 0.078; F-Stat. = 3.877; P-value = 0.005. While Non- audit services (NAS) exhibited a positive significant effect on RFS, AdjR2 = 0.118; F-Stat. = 5.568; P-value = 0.000. Based on the findings, the study recommended that audit firms should regulate the number and length of non-audit services rendered to companies they serve as external auditor and also undergo a frequent review on financial statements where their clients have interest in order to reduce self-review and self-interest threat.

Enhancing independence of local auditing services by profiting from experiences of the Big4 group (KPMG, Deloitte, PWC E&amp;Y) operating in Vietnam market

In Vietnam, auditor independence is guided by the Code of Professional Ethics for Accounting and Auditing issued in accordance with Circular No. 70/2015/TT-BTC of the Ministry of Finance. Independence is the first and most important principle for the professional ethics of auditors. Independence is also an essential component of quality assurance of the auditing service. At present, there are many studies on auditor independence in general and on the relationship between non-audit services and auditor independence over different time and space. The auditing industry in Vietnam is still in a burgeoning state, and its economic and sociocultural context as well as the institutional settings are very specific compared to those of other countries in the world. The article investigates the issue of how local auditing companies could improve their independence and as a result their quality of auditing services based on experiences of the Big4 group already present and operating in Vietnam market.

외부감사인의 비감사서비스 동시 제공이 감사품질에 미치는 영향에 대한 문헌검토와 미래 연구방향의 제안

외부감사인의 비감사서비스 동시 제공이 감사품질에 미치는 영향에 대한 문헌검토와 미래 연구방향의 제안

It is the External Accountant Matter in Business Performance of Small and Medium Enterprises? The Role of Non-Audit Services

It is the External Accountant Matter in Business Performance of Small and Medium Enterprises? The Role of Non-Audit Services

The associations between audit firm attributes and audit quality-specific indicators

PurposeThis study aims to investigate the associations between audit firm attributes (i.e. audit firm size, non-audit services, auditor industry specialization and auditor-client tenure) and specific indicators of audit quality. It also aims to test whether these relationships are moderated by a set of other factors like legal system and US versus non-US settings.Design/methodology/approachThe method of Hunter et al. (1982) is used as a meta-analysis technique to test the study hypotheses and achieve the study aims. A total of 71 published papers from 1992 to 2017 are included.FindingsThere are significant positive relationships between all audit firm attributes and audit quality. Additionally, the associations between all audit firm attributes and audit quality are moderated by proxies for audit quality. Furthermore, these associations are moderated by other variables, such as US and non-US studies, pre-SOX and post-SOX periods, the legal system, the strength of auditing and reporting standards and country classification (developed or developing country).Research limitations/implicationsThe number of studies is insufficient for some variables, and therefore, the results should be interpreted with caution. In addition, the analyzed studies include several proxies, and thus, the number of studies is inadequate for the incorporation of other factors in the meta-analysis (e.g. audit firm experience and audit firm reputation).Originality/valueThis study contributes to audit quality research by providing empirical evidence of the associations between a specific set of audit firm attributes and audit quality using the meta-analysis method. More importantly, the study provides evidence on factors that moderate these associations.

Types of nonaudit service fees and earnings response coefficients in the post-sarbanes-oxley era

In this study, we partition the joint provision of nonaudit services (NAS) into audit-related, tax, and all other services, and examine whether these services have varying impacts on independence-in-appearance, as measured by earnings response coefficients, over an extended period following the enactment of SOX. Prior research examining independence-in-appearance generally focuses on the years surrounding SOX and uses an aggregate NAS measure despite anecdotal and experimental evidence that there may be heterogeneity in how investors perceive different types of NAS. We first show, consistent with prior research, that an aggregate measure of NAS does not, on average, significantly influence earnings response coefficients. We then partition NAS fees by type and provide evidence that investors have negative perceptions of audit-related NAS and positive perceptions of tax NAS, and that these two effects cancel out one another in aggregate. Further investigation reveals that our results are driven by firms with high levels of accruals and smaller firms, which further corroborates our findings. We also find that measures of financial dependence fail to fully capture the channels through which NAS influences investor perceptions. Lastly, we provide evidence that perceptions of tax NAS are, in part, driven by their effect on a firm's tax strategies.

Abnormal Fees and Timely Loss Recognition—A Long-Term Perspective

SUMMARYWe examine the relation between timely loss recognition and abnormal audit, non-audit, and total fees over a period of thirteen years. We use positive abnormal audit (non-audit) fees as a measure of abnormal audit effort (economic bond). We report some evidence suggesting audit effort is associated with slower loss recognition in accruals before the Sarbanes-Oxley Act (SOX) became effective. We find stronger evidence that audit effort is associated with slower loss recognition post-SOX when clients raise substantial external funds or when the auditor is not an industry specialist. Using C_Score, we find a negative association between changes in abnormal audit fees and total fees, and changes in C_Score only post-SOX. We do not find abnormal non-audit fees are associated with the speed of loss recognition. Collectively, the results suggest post-SOX auditors exert more effort when losses are delayed and that non-audit services do not compromise auditor independence.

Audit Tenure and Quality to Audit Report Lag in Banking

This study aims to examine the effect of audit tenure, audit quality, and Non-Audit Service on audit report lag (ARL). The authors will test how the influence of industry specialization auditor moderates the relationship between tenure audit with audit report lag and test how the influence of auditor specialization industry moderates the relationship between audit qualities with audit Report lag on banking companies in Indonesia.This study uses secondary data derived from the annual financial statements of listed companies listed on the Indonesia Stock Exchange between 2012 and 2016. This research uses purposive sampling method and uses multiple linier regression analysis.The results of this study indicate that tenure audit has a negative and significant impact on audit report lag. Quality audit has a negative impact on audit report lag. Non-audit services have a negative effect on audit report lag. The industry specialist auditor moderates the relationship between tenure audit and audit report lag. And the industry specialization auditor moderates the relationship between audit quality and audit report lag.

The determinants of audit report lag: a meta-analysis

PurposeThe purpose of this paper is to further the understanding of the determinants of audit report lag, which is the number of days from a company’s fiscal year-end to the date of its auditor’s report, by synthesizing extant literature. Audit report lag has been a variable of interest in many studies due to its use as a proxy for the occurrence of auditor-client management negotiations and audit efficiency and because long audit report lags delay the release of earnings information to the market.Design/methodology/approachThe author uses meta-analysis to examine commonly identified predictors of audit report lag to determine if the prior research provides a consistent portrayal of audit report lag drivers.FindingsThe author finds that a number of variables relating to client profitability and financial condition, client complexity and audit opinion modifications increase audit report lag. In addition, audit report lag decreases with client size, when clients have positive earnings news to report and when the auditor has long tenure and provides non-audit services. Several variables, such as those relating to corporate governance and various auditor characteristics, have been little explored and would benefit from future research.Originality/valueThese results will be useful to researchers when selecting control variables for future audit report lag studies and provide insights into the key factors that contribute to the delay in audit reporting.

Non-audit services and audit quality: evidence from Germany

The study examines the impact of non-audit services (NAS) on audit quality. It is motivated by the new re-strictions on the joint provision of audit and NAS for EU Member State (Federal Ministry for Economic Affairs and Energy 2016, Regulation 2014, EC 2011) which are based on concerns that auditors’ provided NAS may impair auditor independence. Empirical evidence in Germany as well as in other Continental European countries is limited. We use a sample of 2567 firm-year observations from German listed firms between 2006 and 2013 and test the association between the level and type of non-audit service fees (NAS fees) paid to the auditor and audit quality. Earnings management is used as a proxy for audit quality. The findings indicate that the higher levels of NAS fees negatively affect audit quality. Separating different types of NAS shows that especially other assurance and other consultancy services have a negative impact on audit quality, whereas the level of tax services has no impact on audit quality. In further tests we show that cap on NAS fees at 70% of averaged three prior years audit fees imposed by the EU fails to prevent an impairment of audit quality, but that a moderate level of NAS does not result in lower audit quality compared to audit quality of auditors providing no NAS.