Non-audit Services Research Articles

Audit committee effectiveness and non-audit service fees: Evidence from UK family firms

This study examines whether the presence of an ineffective audit committee at family and non-family firms can influence the firms’ non-audit service purchases from the incumbent auditor. Using a sample of 1736 observations of UK-listed companies from 2005 to 2013, we find a significant positive association between ineffective audit committees and non-audit service fees. This association is more pronounced for family than for non-family firms, suggesting that in the UK, family firms with ineffective audit committees tend to buy more non-audit services from their incumbent auditors than non-family firms. The results also show that family firms with ineffective audit committees pay higher non-audit service fees when their family members own shares or hold board positions, indicating that both types of involvement lead to larger non-audit service expenditures.

Perceived independence or knowledge spillovers: the demand for non-audit services among family businesses

This study investigates the impact of family involvement in top management teams, family firms' life cycle stages, and family firm identification on family firms' demand for non-audit services (NAS). Based on a hand-collected panel dataset including 1,148 German firm-year observations made by 162 family firms, we show that family involvement in top management teams is negatively related to the demand for NAS, resulting in less financial bonding with the incumbent auditor. Moreover, later life cycle stage and high family firm identification positively drive the demand for NAS, which jeopardises external stakeholders' perceptions of auditor independence. By moderating auditor characteristics, we show that if the incumbent auditor belongs to the Big Four, family managers' NAS purchases are similar to those of non-family managers. Moreover, the relationship between high family firm identification and the demand for NAS becomes even stronger when the incumbent auditor belongs to the Big Four.

ОРГАНІЗАЦІЙНІ ЕТАПИ ТА МЕТОДИЧНІ ОСОБЛИВОСТІ НАДАННЯ АУДИТОРСЬКИХ ПОСЛУГ

The article considers theoretical and practical aspects of providing audit and non-audit services. The range of problematic issues in the methodology of audit services and ways of their implementation in the activities of audit firms (auditors) of Ukraine are identified. The unified stages of outer audit services performance are as follows: the formation of the terms of the audit service’s task, the submission by the auditor of a letter-agreement on the performance of the audit service and the negotiation of the contract, the collection of general information on the subject of audit services, the development of the audit service program, assessment of risk factors for the provision of audit services, performance of the audit service and obtaining evidence regarding the tasks of the service and the criteria for its implementation (assessments, etc.), documenting issues that are important in the context of services for the substantiation of the final document, preparation of the report on implementation of services or other final document.

Non-Audit Service Provision and Its Effect on Auditors’ Independence and Audit Quality

This research examines auditors’ perceptions on the provision of non-audit services (NAS) to audit clients towards auditor independence and audit quality. It is a descriptive study that mainly investigates whether auditors perceive the provision of NAS to impair their independence, enhances audit quality, or whether it has no effect on auditor independence. This research utilized a questionnaire that was sent to external auditors that are currently working in public accounting firms in Indonesia. Seventeen auditors responded to the online survey. It was found that auditors somewhat perceive the provision of NAS to impair their independence, as well as enhance audit quality. In addition, they disagree that it has no effect on independence. Moreover, this study found no significant difference in auditors’ perception when gender, working experience, position, educational background, the experience of NAS provision, and age group were considered.

Managerial ownership, audit committees and non-audit services

We extend prior research on corporate governance and non-audit services (NAS) by distinguishing between the management entrenchment region of management ownership and regions in which the interests of management and shareholders converge. Management entrenchment and convergence-of-interests regions were estimated for our sample of 5198 Australian firm-years. NAS is negatively (positively) associated with management ownership in the convergence-of-interests (entrenchment) regions. However, using a sub-sample based on firms that have audit committees, we find the association between NAS and management ownership is confined to the entrenchment region, while audit committee strength is negatively associated with NAS fees across all management ownership regions. JEL Classification: M42, M48

An appraisal of the roles of regulatory authorities on external audit quality in the Nigerian deposit money banks

Evidence from literature shows that different studies have been carried out on regulatory authorities’ role in audit quality and user confidence on the financial statement of corporate organizations in which financial institution is not excluded in the developed countries but empirical evidence from developing countries contexts like Nigeria is inadequate. In light of this, this research paper evaluates regulatory authorities’ roles at improving external audit quality and Users Confidence in financial information in the Nigerian Deposit Money Banks. The study used primary data obtained through a structured questionnaire administered on sampled banks investor in the stock exchange market. A total of two hundred and ten (210) copies of the questionnaire were distributed. One hundred and sixty (160) were returned and found useful for study representing 76% of the total questionnaire distributed. Data collected was analyzed using descriptive statistics like table, frequency, percentage, and mean ranking. Findings from the result of analysis (86;403;3.86;4.03) indicate that the imperatives of regulatory environments at improving audit quality except that FRCN had not been most effective in discharging those responsibilities expected to improve audit quality assurance in the Nigerian Deposits Money Banks. The study concludes that regulatory authorities exert influence on audit quality and the major regulatory environmental variables of audit quality include mandatory rotation of audit tenure, compliance with IFRS, and restriction of non-audit services. The study suggests that regulatory authorities in Nigeria be made to discharge their duties of enforcing and monitoring compliance with regulatory framework and policy guidelines that promote audit ethical conduct.

Threats to Auditor Independence: Evidence from Iran

This paper aims to examine threats to auditor independence in Iran. A mixed questionnaire, including both quantitative closed-ended questions and an openended qualitative question, is developed to investigate threats to auditor independence. Moreover, thematic analysis is used to triangulate the results against financial media articles throughout 1994 – 2014. Findings suggest that while bribery, non-audit services, and economic condition are key threats to auditor independence in Iran, gifts and presents do not compromise independence given the Iranian culture. This study contributes to a better understanding of auditor independence in Iran, which may apply to other regional settings. Moreover, it provides some suggestions to improve the current Iranian Audit Organisation’s auditor independence framework. (JEL M32)

The Impact of Cybersecurity Risk Management Examinations and Cybersecurity Incidents on Investor Perceptions and Decisions

SUMMARYIn response to cybersecurity risk and demand for information about organizations' cybersecurity risk management programs, the American Institute of Certified Public Accountants (AICPA) recently released a cybersecurity risk management examination service. We examine the effect of joint or separate provisioning of this service on investors' perceptions and decisions, and whether these effects differ when a subsequent cybersecurity incident occurs. We find that the negative signal of a subsequent cybersecurity incident reverses investors' positive perceptions of auditor competence and increases investors' sensitivity to potential independence impairments when the cybersecurity is jointly provisioned, leading to lower perceptions of audit quality. We also find that investors are less willing to invest when the examination is jointly provisioned compared to separately provisioned. Our results provide important insights to the literature and to purchasers and regulators by examining an emerging non-audit service and how a signal of non-audit service quality can affect perceptions of audit quality.

Audit Committee Financial Expertise, Litigation Risk, and Auditor-Provided Tax Services

The Sarbanes-Oxley Act greatly expanded audit committees’ oversight responsibilities by requiring that they preapprove all non-prohibited non-audit services (NAS). Using data from 2003 to 2011, we find that tax NAS are significantly lower when accounting financial experts (ACT-FEs) serve on the audit committee, suggesting that ACT-FEs consider auditor independence risk, perceived and/or real, more than other members, including supervisory experts, to the point of not accepting any tax NAS, not even compliance. However, in firms with higher ex-ante litigation risk, ACT-FEs approve relatively more tax NAS than other members, suggesting that they accept the costs of a perceived lack of auditor independence from tax NAS in return for the potential benefits of increased financial reporting quality arising from tax NAS. Our analysis by sub-period (2003 to 2006 versus 2007 to 2011) shows that this result is significant only in the second period. ACT-FEs’ differential evaluation of the trade-off between the benefits and costs of joint audit and tax NAS provision between the two periods suggests the need for additional research in later post SOX years.

The relationship between audit fees and audit committee characteristics: evidence from the Athens Stock Exchange

Strengthening the audit committee is an increasingly important element in the agenda of academics, practitioners and policy-makers in their effort to improve the quality of financial information and to promote audit quality. In this research, we examine the relationship between audit committee characteristics and audit and non-audit fees paid to auditors throughout the first year of the implementation of Law 4449/2017 in Greece. Using a sample of 126 listed companies on the Athens Stock Exchange, we show that audit committee characteristics (i.e. AC size, frequency of meetings and the presence of at least one member with previous experience in a similar position) have a positive relationship with audit fees. Moreover, we find that board size is positively associated with audit fees, which means that the assignment of new roles to audit committees has not been realized to its full potential as recent Law 4449/2017 highlights. Finally, we present evidence that audit committees with a high percentage of members with previous experience in audit committees may be less willing to allow a disproportionate provision of non-audit services in relation to total fees. On that basis, our study offers insights to Greek legislators, auditors, boards and corporate governance scholars.

The Association between Human Resource Investments in the Internal Accounting Control System and Non-audit Fees: Evidence from South Korea

This study empirically examines the relationship between human resource investments in the internal accounting control system (IACS) and firms' non-audit fees. By using hand-collected data on the IACS for firms listed on the Korea Composite Stock Price Index (KOSPI) and Korea Securities Dealers Automated Quotations (KOSDAQ) markets, we find that human resource investments in the IACS are positively associated with firms' nonaudit service fees. Specifically, the findings show that the number of employees working in the IACS positively relates to firms' non-audit fees from the KOSPI and KOSDAQ sample. Our results indicate that this positive association is more prominent for large-sized than small-sized firms and KOSPI than KOSDAQ firms.

Non-Audit Services in Audit Committee Interlocked Firms, Financial Reporting Quality, and Future Performance

We investigate whether board-interlocked firms via an audit committee (AC) board member exhibit correlated non-audit service (NAS) purchases, and whether financial reporting quality and future firm performance vary with the amount of correlated NAS purchases from the AC interlock. We find that AC-interlocked firms have positively correlated total NAS and three NAS sub-types – Tax, Assurance, and Other – in the overall sample period from 2000-2016, and in each of the sub-periods pre- and post-SOX. Firms with a larger NAS component that is explained by the AC interlock tend to exhibit lower financial reporting quality. We also find evidence that firms with higher AC-interlocked NAS purchases are associated with lower future performance, although this association exists only in the pre-SOX period. Overall, the evidence suggests that greater NAS purchases among AC interlocked firms can have a detrimental effect on financial reporting quality and auditor independence. While these detrimental effects are concentrated in the pre-SOX period when there were less restrictions on NAS purchases, we find some evidence that the association with lower financial reporting quality persists in the post-SOX period.

Have Critical Audit Matter Disclosures Indirectly Benefitted Investors by Constraining Earnings Management? Evidence from Tax Accounts

Does the initial disclosure of tax-related critical audit matters (CAMs) constrain tax-related earnings management? If so, it would support the PCOAB’s expectation that investors indirectly benefit from CAMs through the increased attention given to the matters underlying the CAMs. We examine auditors’ initial CAM disclosures of large U.S. accelerated filers and find that tax-related CAM disclosures are associated with a lower likelihood that the audited company uses tax expense to meet analysts’ after-tax consensus forecasts. We find that tax-related CAM disclosures are associated with subsequent increases in the length of and use of uncertain language in tax footnotes. However, we do not find tax-related CAMs are associated with increased audit fees or tax-related non-audit service fees. Our results indicate that the disciplinary benefit of CAMs appears primarily driven by management’s response to CAM disclosures.

Common Auditors in Mergers and Acquisitions: The Impact on Post-Acquisition Financial Reporting Quality

Prior research documents improvements in pre-acquisition outcomes when acquirer and target firms engage the same audit firm to perform their financial statement audits. We examine whether the advantages of engaging a common auditor prior to an acquisition translate into improved post-acquisition outcomes. We find that common auditors improve post-acquisition financial reporting quality as evidenced by a decreased likelihood of misstatement and of missed internal control material weaknesses following an acquisition. These benefits are attributable to same-office common auditors rather than common auditors from different audit offices. We also find that the effects of common auditors are more pronounced when the acquisition is more material to the acquirer and when the time between acquisition completion and the combined entity’s year-end is shorter. Finally, we find that common auditors are associated with lower non-audit service fees. Our findings suggest that common auditors, especially same-office common auditors, provide important post-acquisition benefits.

Corporate governance mechanisms and corporate investments: evidence from India

PurposeThe purpose of this paper is to empirically investigate the influence of corporate governance variables relating to the board of directors, audit and ownership on the agency problems that inflict a firm's investments in capital and research and development (R&D) expenditures. This study posits that the R&D investments are inflicted by the agency problem of “quiet life” whereas “empire-building” agency problem affects capital expenditure decisions.Design/methodology/ approachThis study analyses the investment behaviour of non-financial and non-utility firms listed on NIFTY 200 from FY 2009 to FY 2018 using a static and dynamic model.FindingsThe results from the static model suggest that ownership concentration mitigates the agency problem of the “quiet life” that affects R&D expenditures. However, no corporate governance attribute has a significant impact on R&D investments under the assumption of the dynamic model. In respect of capital expenditures, the analysis of static model yields that audits by large auditor firms and usage of non-audit services ameliorate the agency problem of “empire-building”. The results from the dynamic model show that independent boards worsen it. They also continue to provide empirical evidence in favour of large auditors.Originality/valueThis paper contributes to the literature on the corporate governance-investment association by simultaneously examining the impact of multiple corporate governance attributes on the agency problems of “quiet life” and “empire-building” that affect R&D and capital expenditures, respectively, in a static and dynamic context for a sample of Indian firms.

Auditor-Provided Tax Services and Clients’ Tax Avoidance: Do Auditors Draw a Line in the Sand for Tax Advisory Services?

Recent incidences of audit failures and tax aggressiveness linked to non-audit services have called into question audit firms’ compliance with current restrictions on the provision of aggressive tax planning to their clients. This study investigates whether U.S. audit firms comply with existing regulations. Using quantile regressions, we observe an upper bound in the positive association between auditor-provided tax services (APTS) and tax avoidance. We interpret this bound as evidence of audit firms’ compliance. Interestingly, we observe that the association turns negative for clients with low effective tax rates. This nonlinearity suggests that audit firms take steps to reduce their exposure to these clients. Whereas our main results demonstrate some compliance, trend analysis shows an increase in tax avoidance associated with APTS during our sample period. We also find a more persistent association for larger clients, suggesting that economic bonding influences the tax strategies an audit firm is willing to provide.

ANÁLISE DA RELAÇÃO ENTRE A PERSPECTIVA DE SERVIÇOS DE NÃO AUDITORIA E A QUALIDADE DA AUDITORIA EXTERNA EM EMPRESAS BRASILEIRAS DE CAPITAL ABERTO

As empresas de auditoria possuem um papel importante para os investidores, ao ter a capacidade de reduzir a assimetria de informações entre empresas e usuários da informação contábil. No entanto, quando as auditorias fornecem outros serviços aos seus clientes, como os serviços de não auditoria (SNA), a independência e a qualidade do trabalho do auditor podem se tornar duvidosas. Nesse contexto, o presente trabalho procurou verificar qual a relação entre a realização da expectativa futura de SNA e a qualidade da auditoria. Para isso, foram utilizados os accruals discricionários, via modelo Jones modificado e KS, para capturar o gerenciamento de resultado, variável representativa da perda da qualidade de auditoria. Por meio da análise de dados dispostos em painel das empresas brasileiras de capital aberto, no período de 2010 a 2015, o estudo encontrou evidências significativas de que a realização de expectativa futura de prestação dos SNA impacta negativamente a qualidade do serviço de auditoria. Este estudo contribui para a discussão sobre o tema no Brasil, pouco explorado se comparado com as pesquisas nacionais. Permite aos órgãos reguladores obter mais fundamentações para basear as regulações sobre o tema, e assim garantir maior qualidade no processo de auditoria, via informações livre de viés e tendenciosidade. Sinaliza aos investidores sobre a importância de acompanhar o volume e a existência de perspectivas de SNA nas empresas que pretendem investir. Além disso, propõe uma reflexão sobre a atuação social e ética, no que tange a redução de custos de agência, preponderantes do profissional auditor.

IMPACT OF THE INTERPLAY BETWEEN FORMAL AND INFORMAL INSTITUTIONS IN THE CORPORATE GOVERNANCE AND INDEPENDENCE OF AUDIT FIRMS: A COMPARATIVE STUDY OF CEECS

The central point of this paper is to present the results of comparative meta-analysis concerning the impact of the interplay between formal and informal institutions in the corporate governance and independence of audit firms of Central and Eastern European Countries (CEECs). The paper focuses on the values of the national Financial Audit Law and national auditors’ code of ethics of CEECs, as well as on independence, professional scepticism, non-audit services, audit fees, mandatory audit firm rotation and joint carrying out of statutory financial audit. The main subject of interest concerns two research areas: the character of the relationship between formal and informal institutions, as well as whether the interplay between them is relevant to corporate governance and independence of audit firms of CEECs.

Characteristics of auditors’ non-audit services and accruals quality in Malaysia

PurposeThe purchase of non-audit services from incumbent auditors has generated considerable attention. This study aims to examine the relationship between characteristics of non-audit services, namely, the recurrence and types of services, and accruals quality in Malaysia.Design/methodology/approachThis study analyzed hand-collected audit and non-audit fees of 1,117 observations from Malaysian firms from 2009 to 2011. This study used descriptive analysis, univariate tests and multivariate regression to investigate the potential effect of non-audit services on accruals quality.FindingsNon-audit services are associated with lower accruals quality. Recurring and non-recurring non-audit service fees are detrimental to the quality of accruals, as are all types of recurring non-audit services. Only non-recurring audit-related services decrease accruals quality. The results demonstrate that provisions of non-audit services create economic bonding, and thus a threat to auditor independence. Results remain robust with the inclusion of corporate governance and institutional variables.Research limitations/implicationsThe sample period might represent a limitation as it only covers three years of data. This limitation is mainly because of the nature of data collection of the non-audit services fees.Practical implicationsThe findings could suggest a refinement on the Malaysian Institute of Accountants (MIA) by-laws focusing on auditor independence, and it could assist other regulative bodies such as the Securities Commission, the stock exchange (Bursa Malaysia) in ensuring better governance on the provision of non-audit services.Originality/valueThis study is the first that provides evidence on the relationship between non-audit services, types, and recurring and non-recurring non-audit services and accruals quality in Malaysia.

THE IMPACT OF NON-AUDIT SERVICES ON INSTITUTIONAL INVESTORS’ PERCEPTION OF AUDITORINDEPENDENCE: EVIDENCE FROM TURKEY

In recent years, the audit profession was confronted with different regulations, revised rules on Non-Audit Services (NAS) and on Auditor Independence. In-depth, Professional Accountancy Bodies amended their independence rules according to the Sarbanes-Oxley Act of 2002. For instance, the Securities Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA) in the USA, Capital Market Board (SPK) in Turkey made amendments to their independence rules on Non- Audit Services and on auditor independence in light of the Sarbanes-Oxley Act of 2002. The purpose of this paper is to examine whether “non- audit Services (NAS)” jeopardize institutional “investors’ perception of auditor independence in Turkey”. Therefore, the questionnaire was administered to 34 institutional investors in Istanbul, Turkey. It was generally found that institutional investors’ perception of auditor independence is not impaired at the time of the joint provision of NAS and audit Services to an audit Client.