Impact of non-audit services and tenure regulations on\ud auditor independence and financial reporting quality:\ud evidence from the UK

Doctoral thesis English OPEN
Islam, Md Shahidul (2016)
  • Subject: HG

In response to the spectacular financial reporting failures in Western economies in the\ud early 21st century, the UK has undergone a series of regulatory reforms and the Ethical\ud Standards (ES) by the Auditing Practices Board (APB) are among the most prominent.\ud While the issues of joint provision of audit and non-audit services (NAS) and long audit\ud firm tenure died down following the enactment of ES in 2004, they attracted comments\ud from regulators and policymakers in the wake of the 2007-09 financial crisis. This\ud makes such joint provision and extended tenure long-standing, potentially unresolved\ud issues even in a changed regulatory setting. In this context, the current study has been\ud motivated to investigate the impact of NAS and audit firm tenure regulations on de\ud facto auditor independence and financial reporting quality (FRQ) of FTSE350\ud companies. Using estimates of discretionary accruals and measures for auditors‟\ud economic dependence, the study finds little support against popular arguments that NAS\ud fees and long audit firm tenure erode FRQ. Out of two measures of auditors‟ economic\ud dependence, „total fees to auditors‟ is documented to be significantly negatively\ud associated with discretionary accruals during the post-APB ES period. The „differencein-\ud differences‟ method provides some evidence at a marginally significant level for\ud ES‟s causal impact in improving FRQ during post-APB ES period, ceteris paribus.\ud Tests of association between audit firm tenure and FRQ suggest, with a caveat of\ud marginally significant results, that audits conducted during the post-APB ES period\ud have a mitigating effect on discretionary accruals and that longer audit firm tenure does\ud not compromise auditor independence but in fact helps to improve FRQ in the form of\ud lower discretionary accruals. These empirical findings have weak support for\ud policymakers‟ views that an outright prohibition on supplying NAS for audit clients and\ud mandating more frequent rotation of auditors would help to improve FRQ. Results from\ud the final set of tests suggest a marginally significant negative association between audit\ud firm tenure and discretionary accruals for companies audited by Big4 auditors but not\ud for those audited by their non-Big4 counterparts. This provides insight to the most\ud recent regulatory concerns about the concentrated audit market with Big4 domination.\ud The study, therefore, makes important empirical contributions with policy implications.
  • References (16)
    16 references, page 1 of 2

    The Accounting Review 85(6), pp. 2075-2105.

    Meyer, B. 1995. Natural and quasi-natural experiments in economics. Journal of Business and Economic Statistics 13(2), pp. 151-162.

    Mitra, S. and Hossain, M. 2007. Ownership composition and non-audit service fees.

    Journal of Business Research 60(4), pp. 348-356.

    Moizer, P. 1991. Independence. In: Sherer, M. and Turley, S. (eds.) Current Issues in Auditing. London: Paul Chapman Publishing, pp. 34-46.

    Monroe, G. S. and Teh, S. T. 1993. Predicting uncertainty audit qualifications in Australia using publicly available information. Accounting and Finance 32(1), pp. 79- 106.

    Moore, D. A., Tetlock, P. E., Tanlu, L. and Bazerman, M. H. 2006. Conflict of interest and the case of auditor independence: Moral seduction and strategic issue cycling.

    Academy of Management Review 31(1), pp. 10-29.

    Morgan, S. L. and Winship, C. 2007. Counterfactuals and Causal Inference: Methods and Principles for Social Research. Cambridge: Cambridge University Press.

    Mouselli, S., Jaafar, A. and Goddard, J. 2013. Accruals quality, stock returns and asset pricing: Evidence from the UK. International Review of Financial Analysis 30, pp. 203- 213.

  • Metrics
    views in OpenAIRE
    views in local repository
    downloads in local repository

    The information is available from the following content providers:

    From Number Of Views Number Of Downloads
    Online Research @ Cardiff - IRUS-UK 0 808
Share - Bookmark