Auditor independence and non-audit services - ICAEW

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Figure 4.1: Types of empirical study relating to joint provisiondecisionfeedback loopImpact of provision anddisclosure of provisionon perceptionsChapter 7Determinants ofpurchase decisionChapter 6Joint provisionDescriptive of amountand typeChapter 5Association with auditand non-audit pricingand tenureChapter 8Association with auditopinion and litigationChapter 9Association withearnings qualityChapter 1027
CHAPTER 5DESCRIPTIVE STUDIES OF NATURE AND MAGNITUDE OF NAS FEES5.1 IntroductionIn the absence of a requirement to disclose NAS fees paid to the incumbent auditor, itis difficult to collect systematic data on the extent of joint service provision.Moreover, to obtain evidence on the type of NAS provided by auditors and then torelate this to the amount provided by non-incumbents generally relies on survey data.This chapter presents the most up-to-date evidence available for both the US and UKand indicates the trends in NAS provision over time.5.2 US studiesPalmrose (1988), using questionnaire data, finds that companies primarily used theirincumbent auditor, rather than other firms, for non-audit services. She argues thatattempts to limit or proscribe use of the incumbent auditor need to consider thepotential costs of companies having to use the ‘next best’ supplier in relation to thepotential benefits.Recent data on service provision is presented in the report of the Panel on AuditEffectiveness (POB, 2000, para. 5.13), and is shown in Table 5.1. It is also reportedthat 4% of these firms’ SEC audit clients had consulting fees that exceeded audit fees,up from 1% in 1990.Table 5.1: Analysis of fee income of the Big 5: 1990 and 1999% Total fee income – 1990 % Total fee income – 1999ServicecategoryAll clients SEC auditclientsAll clients SEC auditclientsAccounting & 53 71 34 48auditTax 27 17 22 20Consulting 20 12 44 32Total 100 100 100 100(reported in Ramsay (2001, p.58)Levitt (2000) asserts that consulting services of the Big Five now represent over 50%of their revenues, up from 12% in 1977 (reported in DeFond, Raghunandan andSubramanyam, 2002, p.7).5.3 UK studiesThe requirement to disclose NAS fees paid to the incumbent auditor were introducedin 1991 and apply to accounting periods ending on or after 30 September 1992. Peeland Brinn (1993) examine the disclosures for 100 listed companies for 1991(voluntary disclosure) and 1992. On average, NAS fees represented 73% of the auditfee charged. There was wide variation – ranging from 1% to 430%. Big Six auditorsexhibited considerably higher ratios of NAS to audit fees than non-Big Six auditors.Ezzamel, Gwilliam and Holland (1996) report that the ratio was 87% for a sample of314 quoted UK companies with 1992/3 year ends.28
Page 5 and 6: LIST OF TABLESPage3.1 Definitions a
Page 7 and 8: LIST OF ABBREVIATIONSACCAAICPAAPBAR
Page 9 and 10: Auditor Independence and Non-audit
Page 11 and 12: 2.2 Current regulatory frameworks:
Page 13 and 14: There is limited evidence that, in
Page 15 and 16: firms have, over the last 10 years,
Page 17 and 18: CHAPTER 2AUDITOR INDEPENDENCE2.1 In
Page 19 and 20: low cost strategies to protect and/
Page 21 and 22: • the costs of auditor switching
Page 23 and 24: Johnstone, Sutton and Warfield (200
Page 25 and 26: estrictive. Nevertheless, these stu
Page 27 and 28: 3.3 Independence in professional an
Page 29 and 30: Table 3.1 (cont.): Definitions and
Page 31 and 32: followed by a detailed set of rules
Page 33 and 34: Provision of some of these services
Page 35 and 36: There is a significant self-review
Page 37 and 38: of taking management decisions, sel
Page 39: pieces. While a few research-relate
Page 43 and 44: Ezzamel, Gwilliam and Holland (2002
Page 45 and 46: Parkash and Venable’s (1993) stud
Page 47 and 48: CHAPTER 7IMPACT OF JOINT PROVISION
Page 49 and 50: affirmative to five type of service
Page 51 and 52: McKinley, Pany and Reckers (1985) u
Page 53 and 54: NAS and audit fees regardless of th
Page 55 and 56: 7.3.5 New Zealand studiesGul (1989)
Page 57 and 58: support those of Corless and Parker
Page 59 and 60: CHAPTER 8ASSOCIATIONS BETWEEN JOINT
Page 61 and 62: an independent variable in the audi
Page 63 and 64: Ezzamel, Gwilliam and Holland (2002
Page 65 and 66: 8.7 Auditor tenure and auditor chan
Page 67 and 68: CHAPTER 9EVIDENCE OF ASSOCIATION BE
Page 69 and 70: CHAPTER 10EVIDENCE OF ASSOCIATION B
Page 71 and 72: 10.3.3 Australian studiesGul and Ts
Page 73 and 74: the frameworks are generally imprec
Page 75 and 76: publicly available data of relevanc
Page 77 and 78: Antle, R. and Demski, J.S. (1991),
Page 79 and 80: Craswell, A.T., Stokes, D.J. and La
Page 81 and 82: Frankel, R.M., Johnson, M.F. and Ne
Page 83 and 84: Jeppesen, K.K. (1998), ‘Reinventi
Page 85 and 86: O’Sullivan, N. and Diacon, S.R. (
Page 87 and 88: Schuetze, W.P. (1994), ‘A Mountai

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