Local Competition and Auditors’ Use of Non-Audit Services.

• In Event: Audit Market Competition

Abstract

Non-audit services are a key component of an auditor’s offerings to their clients. With them, auditors can market their unique expertise and provide advisory services far surpassing the necessities of an audit. In this paper, I study the effect of an auditor’s local competitive landscape on their use of non-audit services. My findings show that auditors respond to intensifying competition by increasing their emphasis on selling non-audit services. This response is especially strong when there exists a wide range in the audit qualities being offered by competing firms, audit fees are depressed, or when lowballing is present. The results suggest that non-audit services function as both a differentiation tool for higher quality firms as well as a supplementary revenue stream when audit fees are reduced. Additionally, I find that the use of non-audit services reduces audit quality, regardless of the audit fees paid or the competitive environment.

Author

• Nam Ho, Carnegie Mellon University