The provision of non-audit services by auditors let the market evolve and decide

Abstract

The provision of non-audit services by auditors to their audit clients reduces total costs, increases technical competence and motivates more intense competition. Furthermore, these services do not necessarily damage auditor independence nor the quality of non-audit services. This assessment leads to recommending that legislative policy should aim at facilitating the development and use of the safeguards provided by the free action of market forces. Regulation should thus aim to enable the parties-audit firms, self-regulatory bodies and audit clients-to discover through competitive market interaction both the most efficient mix of services and the corresponding quality safeguards, adjusting for the costs and benefits of each possibility. Particular emphasis is placed on the role played by fee income diversification and the enhancement, through disclosure rules, of market incentives to diversify. JEL codes: K22, K23, M40

Non-audit Services and Audit Quality: Evidence from Private Firms

“…Productive effects arise from the fact that services utilize the same client specific information (Arruñada, 1999). Spillover effects have also been acknowledged by standard-setters: "the provision of such non-assurance services will often result in the assurance team obtaining information regarding the assurance client's business and operations that is helpful in relation to the assurance engagement" (IFAC's Code of Ethics 2005, para.…”

Non‐Audit Service Fees and Financial Reporting Quality: A Meta‐Analysis

“…This argument is derived from the conjecture that providing both audit and non-audit services provides considerable economies of scope. These economies of scope are broadly categorized into knowledge spillover benefits (benefits from transferring information and knowledge); and contractual economies (making better use of assets and/or safeguards already developed when contracting and ensuring quality in auditing) (Simunic, 1984;Beck et al, 1988;Arrunada, 1999;Beattie and Fearnley, 2002). Simunic (1984), however, cautions that efficiencies from joint production of audit and non-audit services can be partially appropriated as rents to the CPA firm supplier, and create a threat to independence.…”

“…These economies of scope are broadly categorized into knowledge spillover benefits (benefits from transferring information and knowledge), and contractual economies (making better use of assets and/or safeguards already developed when contracting and ensuring quality in auditing) (Simunic, 1984;Beck, Frecka and Solomon, 1988;Arrunada, 1999). These two competing hypotheses have spawned a sizable volume of research investigating the association between NAFand FRQ.…”

Regulation of accountants

“…The reason for this is that audit technology is characterized by significant start-up costs, and incumbent auditors earn clientspecific quasi-rents. Arruñada (1999) argues that when firms have a sufficiently diversified client base, they also encourage independence, because the effect of client-specific assets depends on the degree of client diversification. While the author presents this argument in order to support his conclusion that the provision of non-audit services to audit clients should be left to the market, it could also be interpreted as an argument not to interfere in the market altogether, that is, not to intervene if mergers are based on efficiency reasons.…”