Non-audit Services and Auditor Independence: New Zealand Evidence

Abstract:  This paper examines evidence in New Zealand about whether auditors providing more non-audit services are less independent. Three sets of tests are used to address the issue. The first examines whether there is a relation between non-audit fees and audit fees, the second examines whether there is a relation between non-audit fees and audit report qualification or modification, and the third examines whether there is a relation between non-audit fees and stability of audit tenure. The results suggest a potential for the impairment of auditor independence in appearance when auditors provide non-audit services but no evidence of any impact on independence of mind.     

Auditor independence, executive pay and firm performance

This paper investigates whether compensation committees actively intervene to adjust accounting performance‐based incentive schemes for the real, or perceived, reduced earnings credibility signalled by the purchase of non‐audit services. Using a nonlinear, two‐stage least‐squares method that accounts for the simultaneity of executive pay, firm performance and non‐audit fees, we find a significant negative relationship between non‐audit fees and the sensitivity of chief executive officer (CEO) pay to firm performance. Point estimates suggest that the reduced weight applied to accounting performance lowers the incentive component of executive pay between roughly 5 and 8 per cent for the CEO of the ‘average firm’.     

The determinants of audit fees—evidence from the voluntary sector

Given the growing demand for accountability in the public sector, there is a need to begin to investigate audit pricing issues in this sector. This study makes three contributions. First, it develops and estimates, for the first time, a model of audit fee determinants for the charity sector. As in previous private sector company studies, size, organisational complexity and audit firm location are the major determinants. A positive association between audit fees and fees for non-audit services is also observed. Charity sector factors of empirical significance include the nature of the charity (i.e., grant-making or fund-raising), its area of activity and the importance of trading income. Separate models for grant-making and fund-raising charities reflect the relative complexity of the audit of fund-raising charities. Second, the lower auditor concentration in the charity sector market, compared to the private sector market, permits a more powerful test of whether large firms and/or auditor expertise are rewarded with a fee premium. In the more complex audit environment of fund-raising charities, the results show that Big Six audit firms receive higher audit fees (18.5%, on average) than non-Big Six firms. Also, non-Big Six audit firms with charity expertise are rewarded with a fee premium over other non-Big Six firms. Finally, the study demonstrates that the charity audit fee rate is significantly lower than that of private sector companies; in fact it is approximately half. A change in the reporting of charity audit fees is proposed to reflect any element of ‘charitable giving’ by the audit firm.     

The Provision of Non-audit Services and the Pricing of Audit Fees

There have been a number of studies examining audit fees and this research has covered various nations. Recent legislation in Norway requires a company to disclose information on the audit fee and the fees for non-audit services paid to its auditor. Using this data, models of audit fee structure are developed. As with other studies, the size of the company is a major determinant of the audit fee. Payments for non-audit services are positively and significantly associated with audit fees; this relationship is difficult to explain although it parallels some research in the United States. Overall, the models explain about 75 per cent of the variability in audit fees.     

New development: Local public audit—the changing landscape

This article considers the implications for local public audit of the abolition of the Audit Commission and its audit practice (District Audit). The audit regime of NHS foundation trusts, where the Audit Commission is not responsible for auditor appointments or their oversight, is investigated to provide insights for the future of local public audit.     

AUDIT FEES AND AUDITOR CHANGE; AN INVESTIGATION OF THE PERSISTENCE OF FEE REDUCTION BY TYPE OF CHANGE

Despite concern expressed over 'low-balling' or competitive price reduction in the market for audit services, the only empirical investigation of the relationship between initial audit fees, fee recovery and auditor change which has been carried out is by Simon and Francis (1988) using US cross-sectional data, although Pong and Whittington (1994, forthcoming) examine the impact on first year fees. We investigate the impact of auditor change on cross-sectional UK data for 1991 with the aim of discovering whether there is any evidence of price cutting and subsequent price recovery in a European, rather than a US context. We find that there is evidence of such a phenomenon, and investigate further to see whether this effect is robust with respect to the definition used of 'auditor change', and whether the effect varies according to whether the old auditor was a 'Big Six' or 'non-Big Six' firm. We find that the largest reductions (controlling for auditor size) are experienced by firms changing to 'Big Six' firms. We further show that involuntary changes (by auditor acquisition) are associated with positive (although statistically insignificant) increases in fees, whereasvoluntary changesare associated with negative (andsignificant) feereductions. These effects are shown to be robust with respect to model specification. This suggests that fee reductions cannot be ascribed to economies of scale or scope, but is consistent with a 'low-balling' model of behaviour.     

审计师变更与审计质量:一个理论分析

本文通过建立股东、管理层和审计师三方参与的两委托人-单代理人博弈模型,研究了固定审计费用下不同审计师变更方式对审计质量的影响。研究结果表明,审计师强制性单期变更与审计师强制性定期变更下,审计师与管理层之间的合谋将导致严重的财务舞弊;而在审计师自愿性变更下,股东可以利用解聘现任审计师这一威胁来阻止审计师和管理层之间的合谋,使得审计师和管理层的最优策略均为真实披露公司的盈余信息,并发表标准无保留审计意见。     

Public Audit: A Clarification of CIPFA's views – A Reply

In this article I reject Martin Evans' accusation that I seriously misrepresented CIPFA when citing CIPFA's submission to the Nolan Committee in my 1996 FAM article. CIPFA's argument regarding auditor independence is presented as a difference between two conceptual models – the private sector and public sector models of audit. I argue that however Evans tries to present CIPFA's position, any concerns relate to differences of practice, not concept. Whilst it is understandable that CIPFA would wish to present these differences as relating to conceptual frameworks, the argument does not stand up to scrutiny.     

Future Events—A Conceptual Study of their Significance for Recognition and Measurement A Review Article

A number of research papers present evidence of fee premiums paid to specialist auditors. In this paper, we explore for listed and unlisted New Zealand firms not only the question of whether such premiums exist, but perhaps more importantly why they exist. We find evidence of fee premiums for auditor specialisation defined at the city level but not at the national level. We extend testing to examine the issue of self-selection of auditors by clients; we examine several different industry classification schemes and a number of different specialisation measures; and we consider the issue of portfolio specialists. We find from these additional tests that self-selection does not account for the existence of specialisation premiums; various alternative classification schemes all result in premiums at the city level; and portfolio specialists also earn fee premiums when portfolio specialisation is measured at the city level. We find that these specialist premiums apply most consistently to larger client firms and to low-risk firms. We consider various explanations and conclude that this result is consistent with non-specialist auditors providing discounts to attract desirable clients. Desirable clients – those that are large or low risk – are not able to negotiate fees as successfully with auditors who have differentiated themselves via industry specialisation.     

Auditor–Provided Consultancy Services and their Associations with Audit Fees and Audit Opinions

This study examines the relationships between non–audit services fees (consultancy fees) paid to auditors and (1) audit fees, and (2) the occurrence of qualified audit opinions. The positive association between consultancy fees and audit fees is shown to be due to certain company specific events that generate a demand for consultancy services as well as requiring additional audit effort. Identified company specific events are mergers and acquisitions, new share issues, new accounting and information systems, new CEOs, and corporate restructurings. When these events are absent, there is no statistically significant relationship between audit fees and consultancy fees after controlling for company size. Companies that have relatively high consultancy fees are more likely to receive a clean audit opinion. This may be due to the non–audit work clearing up problem areas at the client company or it may be due to high consultancy fees impairing auditor independence. With the available data it is not possible to distinguish between these two reasons.     

The 'Independence' of Expert Opinions in Corporate Takeovers: Agreeing With Directors' Recommendations

Abstract:   The impact of non‐audit services on auditor independence has been the recent focus of regulators worldwide. Using expert reports provided in Australian takeovers, this study investigates a context where the audit independence issue is reversed. As approximately a quarter of expert reports are prepared by the target firm's auditor, concerns have been expressed over the independence of the opinion provided. This paper finds that, relative to other experts, there is no difference in the rate at which experts with other business dealings with the target, including the target's auditor, provide an opinion that agrees with that of directors. However, the capital market reaction around the release of the report indicates that reports produced by auditors are viewed as non‐independent.     

Public Audit: A Comment and a Clarification of CIPFA's Views

This article aims to clarify CIPFA's views on the arrangements for 'public audit', as reflected in its submissions to the Nolan Committee and the subsequent Cabinet Office/Treasury Review of external audit in the public services. In particular, it attempts to correct perceived misapprehensions about CIPFA's attitude to the role of the private audit firms in public sector audit.     

非审计业务对审计市场绩效的影响——基于会计师事务所业务结构的角度

以审计质量和审计收费作为审计市场绩效的衡量指标,从会计师事务所业务结构角度来考察我国注册会计师行业拓展非审计业务对审计市场所带来的影响。实证检验发现,相对于其他事务所而言,非审计业务规模越大和当年非审计业务规模较上年扩大的事务所,其审计质量越好,审计收费也越高。这说明在目前审计服务市场容量有限,竞争过于激烈的环境下,拓展非审计业务有利于增强审计独立性和提高审计收费,是改善行业执业环境的一个重要途径。     

The Market for External Audit Services in the Public Sector: An Empirical Analysis of NHS Trusts

This study investigates the market for audit services in the UK National Health Service (NHS). The market has a number of interesting features, including the presence of the Audit Commission as a regulator, appointer and provider of audit services. Following a theoretical overview of audit pricing in the NHS, evidence is provided on the behaviour of private sector auditors in an environment where audit risk characteristics differ from the private sector. The research also investigates, for the first time in the public sector, the relationship between audit fees and non–audit (consultancy) fees. Comparisons are also drawn between audit fees in the public and private sectors in an analysis of audit fees by industry. Despite some key similarities, the study shows that a number of differences exist between private and public sector audit fee models. In particular, we find no evidence of Big 6 (or mid–tier) auditor premiums, but we do find a significant negative relationship between audit and consultancy fees providing support for the 'knowledge spill–over' hypothesis. In addition, the fees charged to trusts appear significantly lower than their private sector counterparts, despite trust auditors having additional duties to perform. Possible explanations for this finding are offered in the paper.