Chapter 14. Do auditor provided non-audit services (APNAS) fees impair auditor independence?

Christopher Ikin

Abstract

For over 40 years there has been active debate about whether joint provision of audit and non-audit services by a company’s incumbent auditor compromises auditor independence in fact and/or appearance. This chapter analyses the existing literature in the English speaking world and concludes that while there is some evidence supporting a perceived threat to auditor independence, no substantial evidence exists that there is any threat to independence in fact as a consequence of the auditor’s fee dependence.

Introduction

For more than 40 years, regulators, the accounting profession and academics have been debating and researching whether the joint provision of audit services and non-audit services by a company’s incumbent auditor compromises auditor independence in fact or in appearance. Regulators have reacted promptly to recent corporate scandals, despite the lack of convincing corroborative evidence from the auditing research literature. In this chapter I analyse that body of literature which investigates whether auditor independence is impaired as a consequence of the auditor’s fee dependence on auditor provided non-audit services (APNAS). I conclude that while there is some evidence supporting a perceived threat to auditor independence, no substantial evidence exists that supports the notion that there is any threat to independence in fact as a consequence of the auditor’s fee dependence on APNAS.

This review of the APNAS fee research literature is not exhaustive – it excludes, for example, the experimental markets literature and the analytical literature. My intention is to provide an overview and to draw insights from its major findings and propose avenues for future profitable research. The subject matter is both topical and important, as regulatory agencies and professional bodies rush to shore up public confidence in the auditing profession after some notable and highly visible company (and audit) failures. Such reactive responses need to be tempered with insights and evidence from academic auditing research. Research into auditor independence is currently blossoming and it is timely that results to date be brought together and evaluated. Two review articles have appeared recently (Simnett & Trotman 2002; Nelson 2004), but neither deals specifically with APNAS fee dependence nor covers the same breadth of research paradigms.

The rest of the chapter is set out as follows. I begin with a brief overview of the historical setting, and an indication of the current economic climate and theoretical underpinnings that have given rise to the present debate. The next sections describe the literature according to their different perspectives on the way the problem might best be investigated. Archival studies about financial statement users’ perceptions of auditor independence in the presence of APNAS, archival studies into independence in fact, and a small body of literature that investigates the relation between APNAS and independence from a purely audit firm/audit partner point of view are all discussed in turn. Finally, I draw some conclusions and offer some suggestions for future research.

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