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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). |
