Non-audit fees, disclosure and audit quality

Abstract

This paper investigates the effect of non-audit services on audit quality. Following the announcement of the requirement to disclose non-audit fees, approximately one-third of UK quoted companies disclosed before the requirement became effective. Whilst distressed companies were more likely to disclose early, auditor size, directors' shareholdings and non-audit fees were not significantly correlated with early disclosure. These results cast doubt on the view that voluntary disclosure of non-audit fees was used to signal audit quality. The evidence also indicates a positive weakly significant relationship between disclosed non-audit fees and audit qualifications. This suggests that when non-audit fees are disclosed, the provision of non-audit services does not reduce audit quality.

Audit committees, non-audit services, and auditor reporting decisions prior to failure

“…Inconclusive results are also found regarding the relationship between auditor-provided NAS and the likelihood of receiving going-concern opinions for poorly performing companies in both the U.S. and the U.K. (Lennox, 1999;DeFond et al, 2002;Basioudis et al, 2008;Blay & Geiger, 2013). Based on a sample of bankrupt firms, Sharma and Sidhu (2001) find a negative relationship between auditor-provided NAS fees and the likelihood of an auditor going-concern modification.…”

Attributes of audit quality and weak fiscal sustainability countries

“…These three variables are described by prior literature (see previous section's literature discussion) as valuable proxies for audit quality, implying that the bigger the quality of auditing services the higher the propensity for a modified audit opinion issuance, (e.g., Dopuch et al, 1987;Lennox, 1999;DeFond et al, 2002;Johl et al, 2007;Knechel and Vanstraelen 2007;Ruiz-Barbadillo et al, 2009;Chi and Chin, 2011). BIG indicates a dummy dichotomous variable given the value of one if the firm is audited by a Big 4 auditing firm and zero otherwise.…”

“…This is justified by the suggestion that the higher audit complexity will make capturing a material uncertainty far more difficult. Finally, our model takes under consideration past audit opinion (PMOP) as a proxy for current audit opinion, following the same rationale as (Monroe and Teh, 1993;Lennox, 1999;DeFond et al, 2002). The coefficient of this variable is expected to be positive, since a previous year modified opinion, increases the probability for a modified opinion in the current year.…”

“…In this context, this study attempts to examine the relation between each audit opinion and audit quality in a recession. The basis for this analysis lies in the notion that the higher the audit quality, the bigger the propensity to issue a modified audit opinion (Dopuch et al, 1987;Lennox, 1999;Johl et al, 2007;Knechel and Vanstraelen, 2007;Ruiz-Barbadillo et al, 2009;Chi and Chin, 2011).…”

Non-Audit Service and Audit Independence: Evidences from Iran

“…Gore et al (2001) report a positive association between the provision of non-audit services and earnings management in U.K companies, suggesting that auditors' reporting standards are affected by whether the auditor also provides non-audit services to the audit client. Lennox (1999) suggests that NAS increases auditors' knowledge on clients as well as the probability of discovering problems. Their empirical data, collected from UK firms, show a significant, though weak, positive relationship between NAS fees and auditors, a surrogate for audit quality.…”