The Effects of Recurring and Nonrecurring Non-Audit Services

Abstract

The provision of non-audit services by auditors to their clients has been a matter of concern to stakeholders for many years. One issue is whether audit firms cut their audit fees to get access to consulting work. This may lead to poor quality audit work or giving in to client pressure. Empirical studies have often found a positive relation between audit fees and non-audit work. This is counter-intuitive and hard to explain. Beck et al. (1988a) suggested the disaggregation of non-audit services into recurring and non-recurring non-audit services would have differing effects on audit fees and on auditor independence. The potentially differing effects of recurring and non-recurring non-audit services have not been examined much in previous research, as data is hard to obtain. Companies in New Zealand have published some key pieces of data for the period from 1995 onwards. This unique data allows us to test whether recurring and non-recurring services have differing effects on audit fees. The results show no significant association between non-recurring non-audit services and audit fees; results that are either not significant or positive for recurring non-audit services; and a positive association where both recurring and non-recurring services are provided. This paper contributes to the literature by showing that although the effects of different types of non-audit services are different, auditors do not discount their fees for either recurring or non-recurring non-audit services. Further examination of this data also shows that companies which purchase non-recurring services from their auditor are substantially different from those that purchase auditing only or auditing and recurring services.

Keywords: Auditing, Auditor Independence, Non-audit services, Audit fees

JEL Classification: M41, L84, G18