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

Abstract

Auditing as a corporate governance mechanism has attracted considerable research attention. Because of the information asymmetry between corporate managers and outside shareholders, auditors are hired to provide independent assurance that financial statements are prepared following generally accepted accounting principles. The credibility of such assurance depends on the independence, both in fact and in appearance, of the auditor. Over the years, however, the independence of auditors has come under increased scrutiny because of their joint provision of both audit and non‐audit services. A sizable literature on the impact of non‐audit fees on financial reporting quality has developed. The evidence from this literature, however, remains inconclusive. This paper provides a meta‐analysis of the available literature by assessing (a) the net effect of non‐audit fees on financial reporting quality, and (b) whether there is homogeneity in the financial reporting quality proxies used in the extant literature. Findings suggest that the level of client‐specific non‐audit fees is associated with reduced financial reporting quality. However, the underlying studies used to conduct this meta‐analysis are not homogenous.

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

“…It is further argued that the provision of NAS alongside audit services increase an auditor's financial dependence on the client, which gives client management a ground to pressurize the auditor to issue a favourable opinion (DeAngelo, 1981;Habib, 2012). In addition, the consulting nature of NAS is likely to place auditors in positions where they work closely with management, potentially reducing their maintaining of the integrity of auditor reporting (DeFond et al, 2002).…”

Inherent Agency Conflict Built Into The Auditor Remuneration Model

“…Nevertheless, this may jeopardize the fairness of competition within the consulting market (for non-auditor market participants), as the inside information derived from the undertaking of audit services allows for a more precise pricing of consulting Brought to you by | MIT Libraries Authenticated Download Date | 5/13/18 4:29 AM services, thus explaining the auditors tendency towards consulting (Michalak & Waniak-Michalak 2009). For a historical review of this area the reader is referred to Watts and Zimmerman (1983) and other researchers (Francis 2006;Habib 2012;Hay Knechel & Wong 2006;Jong-Hang Choi 2008;Pott Mock & Watrin 2009;Schneider Arnold Church Bryan Ely 2006). This paper takes a general look at the audit market, aiming to provide a neo-liberal perspective of the potential development of the audit market.…”

Use of benchmarks in predicting earnings management?

“…Estimating earnings quality is an important research tool in auditing and financial accounting (Habib, ; Choi et al ., ). This study seeks to determine whether certain benchmarks are strong indicators of earnings management, given that research in Australia is yet to establish an association between earnings management and benchmark beating.…”