How Do Audit Offices Respond to Audit Fee Pressure? Evidence of Increased Focus on Nonaudit Services and Their Impact on Audit Quality

Abstract

We investigate whether audit offices respond to audit fee pressure by increasing their focus on nonaudit services (NAS), as well as the combined effect of audit fee pressure and an increased focus on NAS on audit quality. We find a positive association between audit fee pressure and changes in NAS at the audit office level. We also find increased rates of client misstatement among audit offices that increase focus on NAS in the presence of audit fee pressure compared to audit offices that do not, suggesting a joint effect on audit quality. We find that the reduction in audit quality occurs in large audit offices. Overall, we provide evidence that audit offices’ provision of additional NAS in the presence of fee pressure is an important dimension to consider when examining the effects of declining audit fees on audit quality.

Keywords: audit fee pressure; nonaudit services; audit quality; misstatements

JEL Classification: M40, M41, M42, M48, M49, H83