Further Evidence on Knowledge Spillover and the Joint Determination of Audit and Non-Audit Fees

Posted: 10 Jan 2011 Last revised: 13 Jan 2011

See all articles by Gopal V. Krishnan

Gopal V. Krishnan

Bentley University

Wei Yu

Hunter College - City University of New York

Date Written: December 5, 2010

Abstract

For more than twenty-five years auditing research has examined whether knowledge spillovers or synergies exist from the joint provision of audit and non-audit services as well as whether the audit client benefits from knowledge spillovers. However, empirical evidence on knowledge spillover remains mixed and elusive. We contribute to this debate using a large sample covering both the pre- and the post-SOX era. A post-SOX focus can be potentially informative because SOX has fundamentally changed the mix of audit and non-audit services that can be offered to audit clients. We find a strong and significant negative relationship between audit fees and non-audit fees. Our results suggest that knowledge spillover flows from non-audit to the audit side as well as from the audit side to the non-audit side. For the overall sample, a 1% increase in non-audit fees is associated with a 0.59% decrease in audit fees. Similarly, a 1% increase in audit fees is associated with a 0.49% decrease in non-audit fees. our findings suggest that cost savings due to knowledge spillover are partly passed on to the clients, particularly by Big 4 auditors.

Keywords: Audi fees, Non-audit fees, Knowledge spillover, SOX, Tax fees

Suggested Citation

Krishnan, Gopal and Yu, Wei, Further Evidence on Knowledge Spillover and the Joint Determination of Audit and Non-Audit Fees (December 5, 2010). Managerial Auditing Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1736598

Gopal Krishnan (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

Wei Yu

Hunter College - City University of New York ( email )

695 Park Avenue
New York, NY 10065
United States

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