Evidence on the Joint Determination of Audit and Non-Audit Services

Abstract

In this study, we investigate whether the characteristics of clients, auditors, and the auditor-client relationship jointly determine audit and non-audit services. As done in prior studies, we maintain that fees proxy for the level of service provided and follow the physical flow of knowledge. Our results show that audit and non-audit fees are endogenous. More important, we find that inferences are different on the relation between audit and non-audit fees after we consider the simultaneity of audit and non-audit services compared with those inferences from single-equation estimations. Estimating the system of fee equations simultaneously, we find that provision of audit and non-audit services leads to no relation with audit fees, which suggests that single-equation estimations suffer from simultaneous-equations bias. Further, the finding suggests that there is either no knowledge spillover occur or equal knowledge spillover exist between audit and non-audit services.

Keywords: audit pricing, non-audit pricing, economies of scope, joint provision of services

JEL Classification: M41, M49, Ll5