Does Non-Audit Service Compromise Audit Quality?

Abstract

This paper investigates the relationships between non-audit services, audit fee, audit hours and accounting quality. Previous studies have not provided consistent results for how simultaneous provision of audit and non-audit services by an independent auditor to a client company affects the audit quality. In addition, further studies have identified endogeneity in research method as the primary reason. Therefore, this study analyzed audit quality comprehensively using empirical analysis on data specific to Korea. This study employs research methods contrasting with existing studies in order to present a solution for the controversy related to the endogeneity from the effects of non-audit service provided by an independent auditor on audit quality. This study used audit compensation and abnormal accruals variables simultaneously, and audit time variable includes empirical data from Korean clients for comprehensive analysis. Study results found that the non-audit service significantly affects audit service quality before controlling for endogeneity. However, after controlling for endogeneity, even when the same independent auditor provides audit and non-audit services together, it did not affect the accounting quality.