Auditor independence and non-audit services - ICAEW

within the system), suggesting that the levels of the two services are jointlydetermined. This introduces simultaneous-equations bias into the estimations, andconsequently the results of such studies are unreliable. Using single-equation auditand non-audit fee models, they replicate the positive association between audit andnon-audit fees found in most prior studies. However, using a simultaneous-equationmodel (which controls for the simultaneous bias), it is found that joint provision leadsto lower audit fees (as might intuitively be expected if knowledge flows from nonauditto audit and results in cost savings for the auditor). Moreover, the size of theimpact is economically significant – every 1% increase in NAS fees is associated witha 0.33% reduction in audit fee.8.4.3 UK studiesNAS fees is the variable of interest in Ezzamel, Gwilliam and Holland’s (1996) studybased on data from 314 UK quoted companies. They find a significant positiveassociation between audit and non-audit fees similar to that found in prior US andAustralian studies. They explore the nature of this relationship by examining theinteraction between NAS and other factors that appear to affect audit pricing.Nine interaction terms (these are additional independent variables created bymultiplying NAS fees by one of the other independent variables) are introduced intothe model. Four are found to be significant, suggesting that NAS fees may moderatethe association between other independent variables and audit fees. Specifically, whenNAS is combined with two complexity variables, a Big Six dummy variable 21 and aregulated industry dummy variable, significant negative relationships emerge. Thismeans that Big Six auditees and companies operating in a regulated industry havelower fees, after controlling for other determinants of audit fees.O’Sullivan and Diacon (1996) look at fees in the UK insurance industry, a sector ofthe market where customer and ownership interests merge. NAS fees is one of thevariables of interest. A significant positive association is found, i.e. higher NAS feesare associated with higher audit fees.Beattie, Goodacre, Pratt and Stevenson (2001) explore audit fee determinants in thevoluntary sector using data from 210 top UK charities. This is a market where the BigSix do not dominate to the same degree as in the listed private sector. This study toodocuments a significant positive association between audit and non-audit fees paid tothe auditor.McMeeking, Pope and Peasnell (2002), using data for nearly 500 companies from1992-1995, estimate a simultaneous-equation model of knowledge spillovers, similarto Whisenant et al. (2002). The model estimates reveal a positive relationship betweenaudit and non-audit fees. This is interpreted as implying that the Big Six premium isdriven by endogeneity between audit and non-audit fees, that firms use joint productpricing strategies and that client companies will pay a premium for the provision ofNAS.21 Dummy variables are used in regression analysis to capture possible explanatory (i.e., independent)variables that consist of two categories, such as Big Six auditor or not. The dummy variable is set to thevalue of 1 for Big Six auditors are 0 otherwise.49