The Effect of Non-Audit Services on Client Risk, Acceptance and Staffing Decisions

32 Pages Posted: 4 Mar 2008 Last revised: 27 Sep 2009

See all articles by Stephen Kwaku Asare

Stephen Kwaku Asare

University of Florida - Fisher School of Accounting

Jeffrey R. Cohen

Boston College - Department of Accounting

Gregory M. Trompeter

Boston College

Abstract

The Sarbanes Oxley Act of 2002 prohibited auditing firms from providing certain non-audit services to audit clients and left open the possibility that other currently non-prohibited services could also be banned. This prohibition hinges, in part, on regulatory concerns that auditors were willing to accept prospective higher risk clients in order to obtain more profitable non-audit service engagements. Accounting firms rejected this claim. Given the prospect that more non-audit services could be prohibited, we revisit this debate by examining these competing claims in an experiment in which we manipulate risk and the potential to sell non-audit services and then observe the impact of these variables on auditors' client acceptance and subsequent staffing decisions. Specifically, audit partners received client information and were asked to make an acceptance decision and propose a staffing plan for a potential engagement. We find that a higher (lower) level of risk decreased (increased) the likelihood of acceptance and this relation did not vary with the potential to provide non-audit services. These results do not support the regulators' claims but are consistent with the firms' claims. Further, we found that more experienced auditors were assigned to the prospective client whose management had lower integrity. This staffing plan is consistent with a risk adaptation strategy for the client with lower integrity. The prohibition of certain non-audit services has been justified on the grounds that auditors might engage in systematic opportunistic behavior. However, our results do not find such behavior which should inform the current PCAOB deliberation over whether additional services should be banned. Alternatively, different justification must be found for the prohibitions.

Keywords: Auditor independence, Non-audit, Services, Client acceptance, Staffing Decisions

Suggested Citation

Asare, Stephen Kwaku and Cohen, Jeffrey R. and Trompeter, Gregory M., The Effect of Non-Audit Services on Client Risk, Acceptance and Staffing Decisions. Journal of Accounting and Public Policy, Vol. 24, 2005. Available at SSRN: https://ssrn.com/abstract=1101573

Stephen Kwaku Asare

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
352-392-5860 (Phone)

Jeffrey R. Cohen

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3165 (Phone)
617-552-2097 (Fax)

Gregory M. Trompeter (Contact Author)

Boston College ( email )

Carroll School of Management 140 Commonwealth Avenue
Chestnut Hill, MA 02167
United States
617-552-0878 (Phone)
617-552-2097 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
491
Abstract Views
2,588
rank
57,157
PlumX Metrics