Regulators have expressed concerns that audit firms鈥� emphasis on non-audit services (NAS) such as consulting could distract from an audit, and quality does suffer in certain cases, according to new research from the University of Notre Dame.
鈥� is forthcoming in the Journal of Accounting and Economics from and , assistant professors of accountancy at Notre Dame鈥檚听, along with Thomas Omer at the University of Nebraska-Lincoln.听
Prior research has examined individual clients and whether they hire their auditor for other services. This study is the first to directly examine the 鈥渄istraction鈥� effect when the audit office places an overall emphasis on non-audit services, not just to a specific client.听
鈥淲e find that even clients听who do not purchase significant consulting services receive lower audit quality from offices that provide high听consulting services to other clients,鈥� Beardsley explained.听鈥淭his points to a broader concern of having a business model that includes both audit and consulting services. Too great a focus on consulting relative to auditing can harm audit quality, even if a particular client does not purchase consulting themselves.鈥�
The team examined financial statement restatement rates for clients of audit offices from 2005 to 2015. Each firm they examined had data from a varying number of years, for a total of 29,502 observations in the dataset.
When financial statements are restated because of a material error, this means the audit team missed the error in the initial issuance, indicating lower audit quality.听The team considered the extent of focus on NAS/consulting at听the audit office level using an aggregated measure of total non-audit fees paid by audit clients.
鈥淲e provide evidence on what level of non-audit services leads to a reduction in audit quality,鈥� Imdieke said.听鈥�Our results suggest a reduction occurs when an audit office听receives approximately听one quarter听of its fees from audit clients in the form of non-audit fees. This provides a benchmark for regulators and practitioners concerned about the point at which an office鈥檚 percentage of fees could negatively affect audit quality.鈥�
The level is significant for regulators including the Public Company Accounting Oversight Board and the SEC, which are concerned about the effects of too much emphasis on non-audit services.
鈥淥ur study provides evidence that their concerns are warranted,鈥� Beardsley said, 鈥渁nd should be important to consider for audit firms, audit committees and regulators as they consider the impact of these types of services on audit quality.鈥�
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Contact: Erik Beardsley,听