Non-Audit Service Fees and Audit Quality: The Impact of Auditor Specialization

59 Pages Posted: 27 Jul 2007

See all articles by Chee Yeow Lim

Chee Yeow Lim

Singapore Management University - School of Accountancy

Hun-Tong Tan

Nanyang Technological University (NTU) - Division of Accounting

Date Written: June 2007

Abstract

Recent studies on whether the provision of non-audit services impairs audit quality document mixed results, depending on the proxy for auditor quality used. We posit that the effect of non-audit fees on audit quality is conditional on auditor industry specialization in that audit quality is less likely to be impaired in the case of industry specialist auditors providing non-audit services. Our premise is that industry specialist auditors are more likely to be concerned about reputation losses and litigation exposure, and to benefit from knowledge spillovers from the provision of non-audit services. We find some evidence that audit quality (as measured by increased propensity to issue going-concern opinion, increased propensity to miss analysts' forecasts, as well as higher earnings-response coefficients) is less likely to be reduced for firms that acquire non-audit services from industry specialist auditors compared to non-specialist auditors. Implications are discussed.

Keywords: nonaudit fees, auditor specialization, audit quality

JEL Classification: M49, M41, G14, G38

Suggested Citation

Lim, Chee Yeow and Tan, Hun-Tong, Non-Audit Service Fees and Audit Quality: The Impact of Auditor Specialization (June 2007). Available at SSRN: https://ssrn.com/abstract=1003331 or http://dx.doi.org/10.2139/ssrn.1003331

Chee Yeow Lim (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Hun-Tong Tan

Nanyang Technological University (NTU) - Division of Accounting ( email )

Nanyang Business School
Singapore, 639798
Singapore
+65 6790 4819 (Phone)
+65 6793 7956 (Fax)

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