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

Posted: 24 Apr 2003

See all articles by Scott Whisenant

Scott Whisenant

University of Kansas

Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

Abstract

In this study, we investigate whether the characteristics of clients, auditors, and the auditor-client relationship simultaneously determine audit and non-audit fees. As done in prior studies, we maintain that fees proxy for the level of service provided and follow the physical flow of knowledge. Estimating single-equation models of audit and non-audit fee models, we confirm prior findings of an association between audit and non-audit fees. Studies have concluded such evidence is consistent with knowledge spillovers between the two services. However, we document empirically that audit and non-audit fees are simultaneously determined. Since the data indicate audit and non-audit fees are jointly determined, we then investigate whether previously documented associations between audit and non-audit fees are the result of biased estimation induced by using endogenous variables in single-equation models. In contrast to results from single-equation estimations, we find no association between audit and non-audit fees using a simultaneous specification of the fee system, suggesting that single-equation estimations suffer from simultaneous-equations bias. In sum, the findings are not consistent with the existence of economies of scope from the joint performance of audit and non-audit services after controlling for the joint behavior of audit and non-audit fees. Given the ongoing debate over the level of allowed non-audit services by auditors, the argument for the joint provision of audit and non-audit services is less justified than if joint-supply benefits had been documented.

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

JEL Classification: M41, M40, C30, G10, Ll5, M49

Suggested Citation

Whisenant, Scott and Sankaraguruswamy, Srinivasan and Raghunandan, Kannan, Evidence on the Joint Determination of Audit and Non-Audit Fees. Journal of Accounting Research, Vol. 41, No. 4, pp. 721-744, September 2003. Available at SSRN: https://ssrn.com/abstract=389180

Scott Whisenant (Contact Author)

University of Kansas ( email )

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Srinivasan Sankaraguruswamy

National University of Singapore (NUS) - Department of Accounting ( email )

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Singapore, 117592
Singapore
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+65 6779 2083 (Fax)

Kannan Raghunandan

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-2582 (Phone)

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