Disclosure of non-audit services in annual reports and auditor independence: Evidence from Italy

Abstract

This article explores recent regulatory reforms in Italy and analyzes the fi rst-time application of mandatory disclosure in annual reports of audit and non-audit fees. This information can convey to readers of fi nancial statements an indication of auditor independence (in appearance). An empirical analysis is conducted on annual reports of 239 Italian listed companies for the year 2007.The main research objectives are as follows: (1) to provide a comprehensive description of the relative level of non-audit fees; and (2) to investigate the relation between non-audit services (NAS) and the opinion expressed in the audit report. The evidence shows that the average ratio of non-audit fees (further assurance services, tax advisory services and other services) to total auditor remuneration is 0.24. In particular, there are 38 companies (15.9 per cent) that paid their auditor more for NAS than for audit services; excluding further assurance services, there are 22 cases (9.2 per cent) with a ratio of non-audit fees that is higher than 0.50. In our sample, we observed 231 unqualifi ed opinions (96.7 per cent) and eight qualifi ed opinions (3.3 per cent): a statistical signifi cant relationship between the NAS ratio and qualifi ed opinions was not found. However, the study ' s results show that there is a positive association between the emphasis of matter paragraph in the audit report and NAS. This fi nding cannot be interpreted as an indication of compromised auditor independence, thus opening space for further empirical studies on the use of emphasis of matter paragraphs in auditor reports.

Does Audit Committee Moderate the Relationship Between Auditor Independence and Earnings Management During Initial Implementation of MFRS in Malaysia?

“…Non-audit fees received by the auditors indicate that there is a greater economic dependence on their clients. Ahmad et al (2006) and Ianniello (2010) highlight that economic dependency on a client's fees can impair the auditor's independence. Similarly, Abdul Wahab et al (2020) found that provisions of non-audit services create economic bonding and can pose a threat to auditor independence among Malaysian firms.…”

The Audit Reform and Non-Audit Services in the Light of the Big-4 Transparency Reports – the EU Perspective

“…There are researchers who consider specifically tax services (e.g., Aschauer andQuick, 2018, Kwak andPark, 2020). Another group of researchers distinguishes three basic NAS categories: audit-related, tax, and other services (e.g., Ianniello, 2011;Wahab, Gist and Majid, 2014). On the other hand, Ezzamel, Gwilliam, and Holland (2002) explore five NAS types: accounting-related, finance advice, tax services, management consultancy, and other non-audit services.…”

Non‐Audit Services and Auditor Independence in the 2007 Italian Regulatory Environment

“…58/1998, known as TUF – Testo Unico sulla Finanza , Unified Financial Act), the issue was not resolved. Overall, the Consob communications indicate that, despite the legal limitation of activity in the auditing firms' bylaws, there were elements of ambiguity in the implementation of that rule (Ianniello, 2011).…”

“…For the second objective, the research hypothesis is tested by applying the parametric t ‐test and the nonparametric Two‐sample Wilcoxon rank‐sum (Mann–Whitney) test to the average NAF percentages of the non‐qualified and qualified groups of companies. Based on the results of Ianniello (2011), we also focus our attention on the group of unqualified companies with an emphasis of matter paragraph in their audit report. This aspect was not explicitly measured in other studies on the subject under investigation.…”

“…Regarding the second objective, the hypothesis is that if NAS have an effect on auditor independence, a positive higher correlation is expected between NAF and unqualified opinions. Based on the results of Ianniello (2011), this paper considers also the cases of unqualified opinions with an emphasis of matter paragraph, not explicitly considered in other studies on the subject under investigation. The paper continues with a summary of the literature on the relation between auditor independence and NAS (), followed by discussion of the Italian regulatory environment ().…”