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The IUP Journal of Audit Practice
Provision of Non-audit Services, Low Balling, Audit Tenure and Auditor Type
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This paper investigates the reasons for supply of Non-Audit Services (NAS) by the incumbent auditor.The audit and nonaudit fee data for listed companies in New Zealand is used in the study. The results suggest that the simultaneous provision of audit and NAS are for efficiency reasons rather than maximizing the revenue for auditors. Hence the regulations in place to restrict the amount of NAS that an auditor can provide the client may result in inefficiencies or incurrence of unnecessary costs for the client and auditor.

There has been considerable debate on the issue of joint supply of Non-Audit Services (NAS) and audit services by an incumbent auditor to the audit client. This is also an area of interest to many corporate regulators. There has been various legislations enacted to prohibit the supply of many types of NAS by the incumbent auditor, for instance through the Sarbanes Oxley Act (SOX) in the US. The SOX now does not allow auditors to provide their audit client certain types of management advisory services. Regulators have also imposed a cap on the amount of NAS that an auditor can provide to the audit client.

These regulations have been enacted on the basis that joint supply of audit and NAS to the same client is likely to impair auditors' independence. The argument is based on the notion of fee dependency (Simunic, 1984; DeFond et al., 2002; and Dunmore and Shao, 2006). However, the auditors counter claim this by stating that they are not influenced by fee dependency. Research in this area has shown mixed results (DeAngelo, 1981; Simunic, 1984; Simon and Francis, 1988; Parkash and Venable, 1993; Firth, 1997; Houghton and Ikin, 2001; Lai and Yim, 2002; Ashbaugh et al., 2003; Geiger and Rama, 2003; Whisenant et al., 2003; and Krishnan and Sami, 2005).

 
 
 

Provision of Non-audit Services, Low Balling, Audit Tenure and Auditor Type, incumbent auditor, audit and nonaudit fee, Sarbanes Oxley Act (SOX), incurrence, advisory services, audit and NAS, lucrative quasi rents, Cross Subsidization, Technical Competence, Knowledge Spillovers, Expertise.