Modelling Issues in the Relationship Between Audit and Non-Audit Fees

Abstract:     
Current waves of corporate collapses have brought the discussions about auditor independence into spotlight. In this context, the debate about the propriety of auditors' joint provision of audit and non-audit services to their audit clients has featured considerably. One approach to this debate has been an economic modeling of interactions between audit and non-audit fees. While there are shades of opinions that the relationship can be captured using a single equation model, others are of the opinion that the relationships are better represented in a Simultaneous Equation Model (SEM).

Also, there are concerns about the nature of data used in analyzing audit fees. Cross sectional data have been predominant; however, there are calls for more robust analyzes involving multi-period investigations and, precisely, the use of panel data approach. It has been argued that this affords more observations and enhances causal inferences. In this paper, using very recent data, we compared the result of a single equation model with a SEM of the relationship between audit and non-audit fee for listed companies in the UK and also highlighted the benefits of using panel data approach to the study of this relationships in the context of auditors' independence and improved audit and reporting quality.

The issues addressed in this paper are very pertinent to better understanding of the role of the auditor in the corporate environment. The requirement for firms to disclose their audit and non-audit fees, the outright ban on the provision of certain non-audit services by the auditors to their audit clients, and the enhancements of the roles of the audit committees in determining the level of non-audit services that can be purchased from the incumbent and other auditors all underscore the seriousness of the issues relating to audit and non-audit services.

Keywords: Auditor Independence, Audit fee, Non-audit fee, single equation model, Simultaneous Equation Model and panel data analysis

JEL Classification: M49, M41, M45, G34

Accepted Paper Series