The Distraction Effect of Non-Audit Services on Audit Quality
44 Pages Posted: 7 Apr 2020
Date Written: February 2020
Regulators have expressed concerns that a broad emphasis on providing non-audit services (NAS) to audit clients could distract from the audit function, even for individual clients not purchasing substantial NAS. Motivated by this concern, we examine whether a greater emphasis on providing NAS to audit clients generally (i.e., not just to a specific client) can distract from the audit function, thus reducing audit quality to the client portfolio. We find evidence of a distraction effect of NAS, where a greater emphasis on NAS at the audit office-level results in lower audit quality, even after controlling for other factors including client-specific NAS. Further, we find the association concentrated among clients that purchase lower proportions of NAS, which provides evidence that the observed association relates to distraction effects rather than independence issues examined in prior research. This study should be of interest to audit firms, audit committees, and regulators because it provides new evidence regarding the issues related to a business model that includes both audit and non-audit services.
Keywords: auditor distraction, non-audit services, audit quality, auditor fees
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