Non-Audit Services and Big 5 Auditor Independence: Evidence from Audit Pricing and Audit Opinion of Initial Engagement

29 Pages Posted: 22 Dec 2002

See all articles by Kam Wah Lai

Kam Wah Lai

Chu Hai College of Higher Education

Andrew Yim

Bayes Business School, City, University of London

Date Written: Undated

Abstract

The provision of non-audit services by audit firms to their audit clients has raised hot and continuous debate over auditor independence. This paper contributes to this debate by examining audit pricing and audit opinion of initial engagement when the audit firms also provide non-audit services. Using U.S. data, we report that Big 5 audit firms charge higher audit fees for initial engagement. This is consistent with Dye's (1991) prediction that where audit fees are disclosed publicly, audit firms will not offer discount in audit fees to their new clients. However, we also report that when Big 5 audit firms provide more non-audit services to their new clients, they are more likely to charge less audit fees. This is consistent with anecdotal evidence that audit firms lower their audit fees to accept new clients in the hope of selling their more lucrative non-audit services. However, we find no evidence that audit firms are less likely to issue modified opinion to their new clients when they also provide more non-audit services. We conclude that there is no actual loss of auditor independence despite the loss of perceived independence of the Big 5 firms.

Keywords: non-audit services, auditor independence, initial engagement, discounts in audit fees, Big 5 auditors

JEL Classification: M49

Suggested Citation

Lai, Kam Wah and Yim, Andrew, Non-Audit Services and Big 5 Auditor Independence: Evidence from Audit Pricing and Audit Opinion of Initial Engagement (Undated). Available at SSRN: https://ssrn.com/abstract=340000 or http://dx.doi.org/10.2139/ssrn.340000

Kam Wah Lai (Contact Author)

Chu Hai College of Higher Education ( email )

Andrew Yim

Bayes Business School, City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.bayes.city.ac.uk/faculties-and-research/experts/andrew-yim

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