Auditor-Provided Non-Audit Services: Economic Bonding, Knowledge Spillover, or Both?

• In Event: Non-Audit Services, Audit Timing

Abstract

This study examines whether audit quality varies with different levels of auditor-provided non-audit services (NAS). The effect of NAS on audit quality has been a long-standing debate among academics and regulators. One view is that NAS can strengthen the economic bond between the auditor and client, jeopardizing auditor independence, while another view is that NAS creates knowledge spillover, improving audit quality. Consistent with many insignificant results reported in prior studies, we do not find an association between NAS and audit quality at the conditional mean of the distribution of NAS as a percentage of total fees at the audit office level. However, because the effects of knowledge spillover and economic bonding likely vary throughout the distribution of NAS, we examine these constructs over the distribution of NAS rather than just the conditional mean. The results indicate that a moderate level of NAS is associated with better audit quality than both low and high levels of NAS, providing evidence that both knowledge spillover and economic bonding can affect audit quality.

Authors

• Andrew John Imdieke, University of Notre Dame

• Thomas C Omer, University of Nebraska-Lincoln

• Erik Beardsley, University of Notre Dame