Non-Audit Services and Knowledge Spillovers: An Investigation of the Audit Report Lag
Meditari Accountancy Research, Forthcoming
35 Pages Posted: 29 May 2011 Last revised: 29 Apr 2013
Date Written: November 21, 2012
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.
Keywords: auditing, auditor independence, non-audit services, audit report lag, knowledge spillovers
JEL Classification: M41
Suggested Citation: Suggested Citation