The distraction effect of non-audit services on audit quality

Beardsley, Erik L.; Imdieke, Andrew J.; Omer, Thomas C.

doi:10.1016/j.jacceco.2020.101380

Cited by 56 publications

(24 citation statements)

References 53 publications

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“…However, if auditors provide aggressive tax planning services to audit clients, US jurors tend to charge auditors high punitive damages when audit failure occurs (Thornton & Shaub, 2014). Beardsley et al (2021) find that audit quality is lower (i.e., more restatements) among those audit offices that are more focused on providing NAS, suggesting a distraction effect of NAS on audit quality. However, this effect is driven by nontax NAS rather than APTS.…”

Section: Consequences Of Aptsmentioning

confidence: 99%

Determinants and consequences of auditor‐provided tax services: A systematic review of the international literature

Sun

Habib

2021

Int J Auditing

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We review the empirical literature on the determinants and consequences of auditor-provided tax services (APTS) and provide some directions for future research.We first summarise two theoretical but competing perspectives on APTS provision, namely, the knowledge spillover effect and the impaired independence effect. We then review the evolution of APTS-related disclosures and regulations in selected jurisdictions. Our review of the determinants of APTS suggests that such decisions are related to the cost-benefit trade-off. We then review the literature on the consequences of APTS. This strand of the literature in the United States supports the knowledge spillover effect, but the findings in non-US settings are mixed. The market perceptions of APTS in both the US and non-US settings suggest that market participants react to APTS negatively during uncertain periods, whereas nonarchival studies suggest that the perceptions of APTS vary between stakeholder groups and with the types of APTS provided.

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Section: Consequences Of Aptsmentioning

confidence: 99%

Determinants and consequences of auditor‐provided tax services: A systematic review of the international literature

Sun

Habib

2021

Int J Auditing

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“…The extant researches reveal that beginning with the pivotal work by Simunic (1984), the studies on the issue of NAS and auditor independence include (a) reviews (Francis, 2006;Francis et al, 2004;Hay, 2017;Tepalagul & Lin, 2015), including meta-analysis (Habib, 2012); (b) archival research (Abdul et al, 2020;Ashbaugh et al, 2003;Beardsley et al, 2021;Ezzamel et al, 1996;Frankel et al, 2002;Lim & Tan, 2008;Whisenant et al, 2003) including capital market reaction studies (Chaney & Philipich, 2002); (c) experimental studies (Aschauer & Quick, 2018;Causholli et al, 2014;Friedman & Mahieux, 2021;Meuwissen & Quick, 2019;Tang et al, 2017); and (d) survey research (Akinbowale & Babatunde, 2017;Harber & Maroun, 2020;Onulaka et al, 2019;Quick & Warming-Rasmussen, 2005 ). The majority of the studies are archival and experimental, limiting the ability to critique the existing regulations (Harber & Maroun, 2020).…”

Section: Motivation and Contribution Of The Studymentioning

confidence: 99%

Joint Provision of Non-audit Services to Audit Clients: Empirical Evidences from India

Tiwari

Debnath

2021

Vikalpa: The Journal for Decision Makers

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Executive Summary The provision of non-audit services (NAS) by an incumbent auditor has remained a highly contentious issue. One school argues that the joint provision does not impair an auditor’s independence. Instead, it reduces total costs, enhances the ability to detect material misstatements, increases technical competence due to knowledge spillovers and leads to intense competition. However, a substantial tranche of an audit firms’ income is derived from NAS, and the joint provision increases economic ties with the client. Therefore, another school of thought perceives that the joint provision impairs auditor independence. It is also alleged that auditors expect non-audit work after finishing the auditing job. Their independence is also affected by the risks of self-review. Extant literature reveals that the majority of the studies on the issue are archival and experimental. The studies are concentrated in the US, UK, Australia, Malaysia, Nigeria, South Africa, China, and some of the European Union Nations. The article examines the perspective of chartered accountants (CAs) on the joint provision of NAS in India. The study samples 119 CAs. The reliability of the survey result was measured using Cronbach’s α, and a score of 0.77 indicated acceptable internal consistency reliability. The data were analysed using Wilcoxon signed-rank test and the Mann Whitney U test statistic. The summary of their suggestions for ensuring auditor independence is presented separately. The findings reflect that existing prohibitions imposed by the Companies Act, 2013, are not enough to ensure auditor independence, and the Management Services u/s 144 of the Act needs to be clearly defined. Practitioners do not support the proposition that joint provision should end and a separate category of professionals be mandated to render NAS. However, the recommendations include strengthening provisions to reduce the conflict of interest.

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“…Our analysis focuses on the effect of negative industry shocks on clients in nonshocked industries for two reasons. First, auditors with clients in multiple industries typically face challenges in efficiently allocating their limited attention and resources among their client portfolios (Beardsley et al , 2021; Cassell et al , 2019; Ke et al , 2015; López and Peters, 2012; Nagy et al , 2018). It is, therefore, interesting to investigate whether the negative shocks to certain industry clients (i.e.…”

Section: Introductionmentioning

confidence: 99%

“…shocked industries) in an auditor’s client portfolio. Prior studies (Wallman, 1996; Ferguson et al , 2003; Francis et al , 1999; Reynolds and Francis, 2000; Li, 2009; Beardsley et al , 2021) suggest that local audit offices are the primary decision-making units. They contract with audit clients, administer audit engagements and issue audit reports; therefore, distractive events are expected to have a greater impact at the office level than at the national firm level.…”

Section: Introductionmentioning

confidence: 99%

Auditor distraction and audit quality

Chang

Luo

2022

RAF

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Purpose The purpose of this study is to examine how auditors would react when there are exogenous negative shocks to their client portfolios. Design/methodology/approach Using a sample of 31,256 firm-year observations (2001–2016), the authors investigate whether industry shocks to a subset of an auditor’s clients distract the auditor and affect the professional skepticism applied in the audits of other clients. Findings The authors find that clients of distracted auditors are more likely to meet or beat analyst consensus forecasts, suggesting that auditors’ professional skepticism is compromised by distractive events. The cross-sectional analyses reveal that the negative impact of the distractive events on audit quality is more pronounced when the distracted auditors audit less important clients, face lower third-party legal liabilities and experience higher growth. Using an alternative measure of audit quality, the additional analysis shows that clients of distracted auditors exhibit a higher probability of restating their earnings in subsequent years. Overall, the empirical evidence suggests that when distracted, auditors render lower quality audit. Originality/value The study complements recent work by Cassell et al. (2019), which shows that the 2008–2009 financial crisis affected the quality of the audits of nonbank clients of bank-specialized auditors. While Cassell et al. (2019) focus on one shock (financial crisis) to one industry (i.e. the financial services industry), the study examines more frequent shocks over a wide range of industries to identify the potential effects of distractive events, improving the generalizability of the findings to all industries and all auditors (specialist and nonspecialist) in nonrecession periods.

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The distraction effect of non-audit services on audit quality

Cited by 56 publications

References 53 publications

Determinants and consequences of auditor‐provided tax services: A systematic review of the international literature

Determinants and consequences of auditor‐provided tax services: A systematic review of the international literature

Joint Provision of Non-audit Services to Audit Clients: Empirical Evidences from India

Auditor distraction and audit quality

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