The Relationship Between Categories of Non-Audit Services and Audit Fees: Evidence from UK Companies

Abstract:     
This paper examines the relationship between various categories of non-audit services and levels of audit fees using a sample of UK companies. Compared to previous research, we use a more refined classification of non-audit services both for incumbent and non-incumbent auditors, and control for the existence of an internal audit function and world-wide disclosure by the client firms. Our results suggest that fees for each of corporate finance services and taxation services paid to incumbent auditors were significantly correlated with levels of audit fees. However, these results did not hold irrespective of type of disclosure. In the case of taxation services there was no significant association with audit fees for companies without overseas subsidiaries, whereas in respect to corporate finance services the association was more pronounced for these companies. Moreover, in contrast to Simunic (1984) but consistent with O'Keefe et al (1994), there was no significant association between management consultancy fees paid to incumbent auditors and audit fees. No significant associations were detected either in the case of non-incumbent auditors, and the existence of an internal audit function in the client firm was only significant for the whole sample, but not for the sub-samples classified by type of disclosure.

JEL Classification: M49

working papers series