Non-Audit Services and Knowledge Spillovers: An Investigation of the Audit Report Lag

Abstract:     
The accounting profession has argued strongly against claims that the provision of non-audit services to audit clients leads to impaired auditor independence, instead claiming that the joint provision of non-audit services and audit services creates knowledge spillovers that lead to a more efficient audit. In this paper, we seek to provide evidence concerning knowledge spillovers by examining the association between the audit report lag and non-audit services. We obtain a sample of 260 firm-year observations from the financial reports of New Zealand public companies over the period 2004-2005 and test for associations between non-audit services and audit report lag, controlling for other variables. We find evidence that non-audit services are associated with a shorter audit report lag, but that this occurs in a subsequent period, not in the year in which the services are provided. The results suggest that firms purchasing non-audit services from their incumbent auditors benefit from knowledge spillovers in the form of a shorter audit report lag, but not immediately. Previous studies have examined whether there is a relationship between non-audit services and audit report lag in the concurrent period. We extend tests to also examine the relationship between NAS in one year and the audit in a subsequent year. These results are more consistent with knowledge spillovers (that allow a more efficient audit) than they are with loss of independence by the auditor, because loss of independence would take effect immediately, while knowledge spillovers might take time.

Number of Pages in PDF File: 35

Keywords: auditing, auditor independence, non-audit services, audit report lag, knowledge spillovers

JEL Classification: M41

Accepted Paper Series