Auditor independence and non-audit services - ICAEW

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