Restricting Non-Audit Services in Europe – The Potential (Lack of) Impact of a Blacklist and a Fee Cap on Auditor Independence and Audit Quality

Abstract

The European audit reform aims to stabilize financial markets by enhancing trust in the statutory audit. To strengthen auditor independence and to increase audit quality, the provision of nonaudit services to audit clients is further restricted. The supranational introduction of a blacklist, including prohibited non-audit services, and of a cap on the volume of non-audit fees is a novelty on the European level. The purpose of this paper is threefold. First, we analyze these measures in light of both current national restrictions of non-audit services and auditor fee disclosure requirements in France, Germany and the UK. Second, we assess the potential impact of the cap on the volume of non-audit services by providing descriptive evidence on current fee levels in these three countries. Third, we critically assess the impact of the audit reform regarding non-audit services in light of audit research by analyzing the state of the art. On this basis, we doubt whether the European reform of auditor-provided non-audit services is effective and efficient. The main goal of enhancing perceived auditor independence and, thus, public trust in audited financial statements of public-interest entities may be hardly achieved and the blacklist might present a tradeoff between auditor independence and audit quality.

The impact of auditor brand name on auditor remuneration in a large private client segment

“…The average nonaudit to audit fee ratio is 57.0%, which is higher than reported in studies on listed companies in Germany—Köhler and Ratzinger‐Sakel () report a nonaudit to audit fee ratio of 47.8%). Hence, despite the lower visibility of private audit clients and less restrictions on the provision of nonaudit services (Zerni, ), the relative level of nonaudit fees among private clients is not excessive—it is even below the nonaudit fee cap for public interest entities (PIEs) introduced by Regulation 537/2014 (Ratzinger‐Sakel & Schönberger, ). The switching rate in our sample is similar to recent studies on the US audit market, with a low rate in 2010 with 22 switches (3.7%) and with 39 switches (6.3%) in 2011—For example, Lai () reported an overall switching rate of 8.2% for the period 2004–2011, and Dobler () reports a switching rate below 2% for 368 large German family firms in 2009.…”

“…The latter might indicate superior (perceived) service quality. For an overview of the (differences between) national disclosure requirements in the UK, France, and Germany, see Ratzinger‐Sakel and Schönberger (). Moreover, the available fee disclosures in Germany do not include information on the frequency of the respective services.…”

Does IFRS Have Impact on Earning’s Quality and Audit Fee?

“…Auditors from big KAP usually relate to the high-quality auditors so that they can assist their clients to improve the earning's quality (Becker, Defond, Jiambalvo, & Subramanyam, 1998). Variables of MGR, AUD_ CHG, COM_IND, COM_MEET showed some elements of corporate governance (Sakel & Schonberger, 2015).…”

Interrelation of Capital Markets in the Context of Increased Audit Oversight in the European Union – Evidence on Third-Country Auditors

“…More recently, there are papers that briefly discuss the major regulatory innovations in the EU relating to auditing and provide general ideas for future research driven by the Statutory Audit Directive (such as Afterman, 2016; Köhler, Quick, Willekens, 2016;). Other studies focus on the implications of the new audit framework for the provision of non-audit services (Holm, 2016;Ratzinger-Sakel & Schönberger, 2015). Some studies explore the potential benefits and costs of the recent audit reforms, such as Kend and Basioudis (2017) who obtain the views of UK-relevant stakeholders on this matter, while Duhovnik (2016) points out problems that could arise in a small European country with just a few public interest entities and a weak audit market.…”