Non-Audit Service Fees and Audit Quality: The Impact of Auditor Specialization

By C. Lim, Hun-Tong Tan. 2008

471 citations recorded by the source corpus.

Recent studies on whether the provision of non-audit services impairs audit quality document mixed results, depending on the proxy for auditor quality used. We posit that the effect of non-audit fees on audit quality is conditional on auditor industry specialization in that audit quality is less likely to be impaired in the case of industry specialist auditors providing non-audit services. Our premise is that industry specialist auditors are more likely to be concerned about reputation losses and litigation exposure, and to benefit from knowledge spillovers from the provision of non-audit services. We find some evidence that audit quality (as measured by increased propensity to issue going-concern opinion, increased propensity to miss analysts' forecasts, as well as higher earnings-response coefficients) is less likely to be reduced for firms that acquire non-audit services from industry specialist auditors compared to non-specialist auditors. Implications are discussed.

Subfields: Accounting

View Paper: https://www.semanticscholar.org/paper/7c280130c3bd3e3cec981b91a51e3cf5bf31b940

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Citations in the corpus

• Auditor Independence and Audit Quality (2015, background): “However, Lim and Tan (2008) find that the likelihood of a GCO is higher when NAS acquired from industry specialists increase.”
• Audit quality, debt financing, and earnings management: Evidence from Jordan (2017, background): “Lim and Tan (2008) reported that specialised industry audit is more concerned about the loss of reputation and litigation exposure than nonspecialists, and they take advantage of knowledge spill-overs from non-audit services provision.”
• Does Auditor Tenure Improve Audit Quality? Moderating Effects of Industry Specialization and Fee Dependence (2009, unknown): “…research suggests the same outcome but the 4 Auditor specialization is typically measured in terms of market share (e.g., Chung and Kallpaur 2003; Lim and Tan 2008), which further reinforces the point that specialists have more incentives to be independent as they have more market share to lose…”
• Audit and non-audit fees and capital market perceptions of auditor independence (2009, unknown): “2002; Ashbaugh et al., 2003; Chung and Kallapur, 2003; Larcker and Richardson, 2004; Kinney et al., 2004; Srinidhi and Gul, 2007; Lim and Tan, 2008).”