The Provision of Non-Audit Services, Independence Threats, and their Impact on Private Investors’ Perceptions of Auditor Independence: An Experimental Study

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 14: Auditor Independence

Abstract

The provision of non-audit services by the statutory auditor may have a negative impact on independence in mind as well as on independence in appearance. Therefore, the European Commission suggests preventing auditors from offering non-audit services to audit clients to a large extent. Prior research revealed that different advisory services have a different effect on perceived auditor independence. This could be caused by the fact that a different number and intensity of independence threats (self-interest, familiarity, self-review, advocacy) is attached to individual services. Therefore, this experimental study investigates the effect of such threats on independence perceptions of German individual investors. Univariate results show that a high self-interest and a high familiarity threat, as well as the existence of a self-review threat, impair auditor independence in appearance. However, the existence of an advocacy threat does not affect investors’ trust in auditor independence. Multivariate analyses confirm these findings with regard to self-interest and familiarity threats. On the other hand, the negative effect of a self-review threat is not confirmed by all regression models. In particular, the provision of services with regard to internal controls, and thus the self-review threat, interacts with the self-interest threat. They negatively impact perceived auditor independence when non-audit fees are high. However, no significant interactions with familiarity are found. Based on these findings a general prohibition of non-audit services does not seem to be necessary. However, a maximum level of non-audit fees an audit firm can receive from an audit client might be considered.

Authors

• Reiner Quick, Technische Universität Darmstadt

• Bent Warming-Rasmussen, University of Southern Denmark