NAS Effect on Auditor Independence
Investigations on auditor independence are numerous, and many of them include an extensive range of non-audit services. Generally, studies from both previous and after the Enron scandal imply that perceptions of independence can differ due to the extent of non-audit service bond between auditor and audit client, and also the kind of NAS offered (Schneider et al., 2006). Furthermore, there is lack of reassuring confirmation that implies that NAS has an effect on independence. Practically, NAS can harm the “perception” of auditors’ independence (Bogle, 2005). Other investigations have tested the connection between non-audit services and the opinion in audits. The studies have shown both positive relationship (Wines, 1994; Sharma & Sidhu, 2001) and no indications of connection (Craswell A. T., 1999; Craswell, Stokes, & Laughton, 2002).
Many studies that examined the interrelation between non-audit services and auditors’ independence have shown negative influence (Quick & Warming- Rasmussen, 2009; Beattie et al., 1999; Krishnan, Sami, & Zhang, 2005). For example, Sikka (2009) questioned auditors’ independence based on the fact that many financial businesses received unqualified audit opinions just before going into bankruptcy. The main contributor to the independence threat, expressed by Sikka, is the high level of NAF received by the audit firms from their clients. Another study pointed to similar conclusion, it stated that audit firms are capitalist businesses that rely upon companies in order to obtain income (Powers, Troubh & Winokur, 2002).
Several studies have indicated that NAS contributes to an economic relationship between the client and the auditor, which may reduce auditors’ objectivity in a negative way (Schneider, Church, & Ely, 2006). For instance, Beck, Frecka and Solomon (1988) examined auditor independence by looking at repetitive and non-repetitive provision of NAS. Their results showed that auditor tenure for organizations with great repetitive NAS is commonly higher when comparing to audit tenure of organizations that receive sporadic NAS. Based on these facts, there is an enhanced relation among auditors and their clients with respect to the offering of non-audit services. Parkas and Venable (1993) also claimed that repetitive NAS is expected to affect auditor independence in a negative way.
They classified tax, information systems and pensions and planning as recurring NAS. Non-recurrent NAS, which is services not provided on a yearly basis, were estimated to lead to a minimal economic relationship. Such services included, among others, mergers and acquisitions. Moreover, Doyle, Hughes and Glaister (2009) asserted that tax work is, in general, a recurrent NAS. Further they stated that tax practice is a hazardous environment to operate in. Yancey (1996)
had similar reasoning by claiming that tax involvements generate roughly 50 % of all defaults claims by auditors. Risky factors connected to tax engagements were also emphasized by Shaefer and Zimmer (1998). Their report showed that 48 % of new default claims were due to tax commitments during 1987 – 1993.
Furthermore Frankel, Johnson and Nelson (2002) reported that high levels of NAS in relation to total audit fees (AF) is linked to a propensity to give partial financial reports. Therefore, according to the authors, purchasing a high amount of NAS is associated with auditor independence threat. Similar conclusion was found by Ianniello (2010), who claimed that unqualified audit opinions are comparatively more common in situations where high amount of NAS is obtained from audit clients. Additional research supports the hypothesis that providing NAS to audit clients weakens the quality of financial reporting (Frankel et al., 2002; Ferguson, Seow, & Young, 2004; Larcker & Richardson, 2004; Iyengar, Zampelli, & Cohen, 2007). Other investigations in non-audit fees indicated that the disclosure of NAF might have negative results, which in turn cause incorrect assessment by investors with regard to auditor independence (Dopuch, King, & Schwartz, 2003).
2 Literature Review .
2.1 Non-Audit Services
2.2 Auditor independence
2.3 NAS Effect on Auditor Independence
2.4 Agency Theory
2.5 Audit – United Kingdom
3 Method .
3.1 Research Design .
3.2 Data Collection
3.3 Sample Description
3.4 Data Analysis
3.5 Strengths and Limitations
4 Empirical Findings
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The Effect of Non-Audit Services on Auditor Independence