Audit Fees, Non-Audit Fees, and Auditor Going-Concern Reporting Decisions in the United Kingdom

Abstract

The accounting profession has come under increased scrutiny over recent years about the growing amount of non-audit fees received from audit clients and the possible negative impact of such fees on auditor independence. The argument advanced is that providing substantial amounts of non-audit services to clients may make it more likely that auditors concede to the wishes of the client management when difficult judgments are made. Such concerns are particularly salient in the case of reporting decisions related to going concern uncertainties for financially stressed clients.

This study empirically examines audit reports rendered to financially stressed companies in the United Kingdom (U.K.) and the magnitude of audit and non-audit service fees paid to the company's auditors. We find that the magnitude of both audit fees and non-audit fees are significantly associated with the issuance of a going-concern modified audit opinion. In particular, financially stressed companies with high audit fees are more likely to receive a going-concern modified audit opinion, whereas companies with high non-audit fees are less likely to receive a going-concern modified audit opinion. Additional analyses indicate that our results are generally robust across alternative model and variable specifications. Overall, we find evidence supporting the contention that non-audit fees have a significant negative effect on going-concern reporting judgments for financially stressed U.K. companies.

JEL Classification: M49, G33, M47