Non-Audit Services And Audit Quality: Blessing Or Curse?

Abstract

This study investigates whether and how audit quality is associated with the provision of non-audit services by the statutory auditor. Using a sample of 1,008 firm observations of major German listed companies for the sample period 2004-2011, our study is one of the first to thoroughly analyze this issue empirically for the German audit market. Consistent with prior studies we choose discretionary working capital accruals as our proxy for audit quality. Our empirical results demonstrate that total non-audit fees in general and audit related fees in particular are negatively associated with audit quality, while provided tax and other advisory services have an insignificant impact on audit quality. Our results imply that non-audit fees are a significant factor with regard to auditor independence and economic auditor-client bonding while we are not able to detect compensating high knowledge spillover effects from these services. The empirical results are robust to alternative accrual measures and estimation model specifications, while our empirical evidence is not robust with regard to alternative fee measures.