How Are Audit Quality and Pricing Affected by Characteristics of the Non-Audit Services Market?

51 Pages Posted: 2 Aug 2018 Last revised: 3 Sep 2019

See all articles by Henry L. Friedman

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area

Lucas Mahieux

Tilburg University - Department of Accounting & Accountancy

Date Written: August 30, 2019

Abstract

How can features of the market for non-audit services (NAS) affect an audit firm's incentives to invest in audit quality, the price at which it offers audits, and the effects of prohibitions on providing NAS to audit clients? We address this and related questions in a model focusing on an audit firm that can provide both audit and NAS to a market of heterogeneous clients. We provide several interesting results. First, selling auditing and NAS jointly (i.e., bundling) may decrease audit quality because it changes the types of clients who purchase high-quality audits. Second, absent competition, a ban on NAS provision to audit clients can improve audit quality even without negative effects of NAS on auditor independence. Third, with NAS competition, bans on the provision of NAS to audit clients can decrease audit quality. These contrasting effects suggest a more nuanced view of how regulating an auditor's provision of NAS might affect audit quality, and operate through effects related to competition, pricing, and segmentation on ex ante quality investment incentives rather than previously identified auditor independence or knowledge spillover channels.

Keywords: Audit quality, Auditing services, Non-audit services, Competition

JEL Classification: L10, M41, M42

Suggested Citation

Friedman, Henry L. and Mahieux, Lucas, How Are Audit Quality and Pricing Affected by Characteristics of the Non-Audit Services Market? (August 30, 2019). 29th Annual Conference on Financial Economics & Accounting 2018. Available at SSRN: https://ssrn.com/abstract=3212992 or http://dx.doi.org/10.2139/ssrn.3212992

Henry L. Friedman (Contact Author)

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D406 Anderson Complex
Los Angeles, CA 90095-1481
United States

Lucas Mahieux

Tilburg University - Department of Accounting & Accountancy ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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