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The provision of non-audit services by firm's external auditors to the audit clients has long been regarded, by regulators in the UK, the US, Australia and various other countries, as a threat to auditor independence.
Dependable information is essential to existence of the society. The investors making decisions either to purchase or sell securities, the banking decision whether to approve a lone, the government in obtaining revenue based on income tax returns, as all are relying upon information provided by others. In many these situations, the aims of the providers of information run directly counter to those of the users of information. Implicit in this line of reasoning is recognition of the social need for independent public accountants individuals of professional competence and integrity who can legally confirm whether the information used which provided by managers constitutes a fair picture of what is really going on in business(Whittington and Pany, 2002).
Auditing plays a vital role in business, government, and the economical environment. This is because auditors add to the reliability and quality of the financial statement of the entities; auditors can provide to directors and officers constructive observations arising from the audit process; and thereby contribute to the effective operation of business, capital markets and the public sector.
Motivation of the study:
There has been increasingly concerned by the current .....about the auditors' reliability and objectively
Much of the current publicly expressed concern about the integrity of auditors and theinfluence of NAS on auditor independence is based on opinion and assertion relating principally to the current causes célèbres, and observers generally are not looking beyond these cases. As independent academics, we have been asked by the Institute of Chartered Accountants in England & Wales (ICAEW) to conduct a review of 'available research,
professional and academic, on the provision of non-audit services by audit firms to audit clients'. Our review, therefore, covers research of a theoretical and empirical nature but excludes commentaries and opinion pieces. The majority of research into NAS has been conducted in the US environment. Gwilliam (1987, ch.3) outlines the differences between the US and UK accounting and auditing contexts and argues against the general
assumption that US research results translate unambiguously to the UK.
Aims and Objectives of the study:
Rationale and Justification for the study:
The studies published by Li et al. (2003) and Ahmad et al. (2006) resemble this study most closely, since they also directly use both: audit and non-audit fees.
Auditor independence and the provision of non-audit services (NAS)
The controversial issue of providing of non-audit services by firms' auditor to the audit clients has been recognized for a long time by many professional bodies( Gul et al 2007). NAS are generally considered as any another services achieved by firms' external auditor which the auditor provides such a services to the managers to improve the business performance, as these services classified as book-keeping, management advisory service(MAS), internal audit services, taxation and other legal advisory and designing the financial information system( Arens et al; Alleyne et al, 2006.; Arens et al, 2008.; Law, P 2008)
In terms of the issue of non-audit advisory services and its effect on auditor independence, there are numerous studies that investigate whether there is a relation between NAS provided by firm's external auditors and auditor independence. However,
On the other hand, there are many research papers report that the provision of NAS does not influence on auditor independence (Jenkins and Krawczyk, --). A study carried out by Mckinley, Pany, and Reckers(1985) indicated that providing such non-audit service like advisory service to improve a firm's performance by improving its internal control system, did not considerably influence the reliability of financial statement and auditor independence therefore. Another study by Pany, and Reckers(1988) show that increasing the level of management advisory services(MAS) does not impair the trust of financial reports and the auditor independence as a consequences. A revision of 20 year empirical research study done by Kinney(1999) states that there is no significant evidence that there is a rise concern by investors based on high level of NAS provided by firm's auditors. Wallman (1996) also found small empirical evidence that auditor independence impairs by NAS.
According to Craswell (1999) In a few number of studies, the impact of nonaudit services on auditor's reporting decisions has been investigated in order to evaluate the prospective risk that auditors might not have acted independently. For example, Barkess and Simnett (1994); Wines (1994); and Craswell (1999) empirically investigate the association between NAS and auditor's reporting decisions by using publicity available information in Australia. The advantages of these studies could be that their evidence are related to the impacts on auditor independence. However, the results of these studies are mixed; while Wines states an relationship, Barkess and Simnett, and Craswell were their finds that the evidence suggests that auditor independence measured by auditor's reporting decisions are not associated by the provision of nonaudit services. Moreover, An extended analysis study done by Beck et al.(1988) which empirically investigate the join supply of nonaudit services and auditing by distinguishing both characteristic of NAS: recurring and non-recurring. However, they it has been argued in this study that knowledge spillovers resulting from recurring NAS have the influence of reducing the threat to auditor independence, whereas the contradictory effect is experienced with non-recurring nonaudit services.
In a widely cited study done by Frankel et al (2002) using a large sample of US data based on the firm's financial reporting during the period between February and June 2001, in order to investigate the association between three proxies for the independence of firm's auditors "(earnings management)" and a proxy the purchase of nonaudit services. A significant positive association has been found between earning management and the purchasing of the provision of NAS. They suggest that increasing the acquisition of nonaudit services can compromise the auditors' independence. However, Cahan et al (2008) state that the study finds in Frankel et al (2002) has been criticized by many recent studies. For example, Kinney and Libby(2002) argue that the results study of Frankel et al. are quite complicated to interpret due to limitation of various used, as there few problems in a comprehensible definition based on "the conceptual relations between management and auditor incentives and earnings management" as well as some statistical issues. However, in terms of addressing some of these concerns, more recent studies have investigated this issue (the association between NAS and the independence of auditors) and it has been found that the relationship between the pushasing of nonaudit services and the audit independence is either significantly negative association ( Antle et al., 2006) or not significant ( Reynolds et al., 2004; chung and Kallapur, 2003; Ashbaugh et al., 2003). However, Frankel et al found that there is a positive association between the two variables mentioned above.
Defond et al. (2002) investigate in their study the issue of whether auditor independence compromised by NAS, base on the proxy statement in the field of SEC during the period from February 2001 to December 2001 by analyzing a large sample of 4, 105 firms. The finds suggest that there is no significant relationship between the impaired auditor independence and nonaudit services fees, Furthermore, it has also been reported in this study that there is no association has found between audit fees and going- concern opinions. However, their finds are consistent with market-based incentives, such as reputation and litigation losing cost, dominating the expected benefits from compromising auditor independence.
A semi-structured interviews and mail questionnaire study curried out by Canning and Gwilliam(1999) investigates the associations of the provision of nonaudit on the independence of auditors based on the Irish commercial environment, as the study's environment was not previously investigated such study for this purpose. The study reports that the main key findings were that "perceptions" of auditor independence were significantly impaired when the provision of nonaudit services was provided to auditor's clients by personal involvement in auditing process rather than either auditing a department separately whiten the firm's audit or to provide NAS clients only. However, this study focused on the financial statement's users who were keen to accept such a reduction in the independence of their auditors resulted upon the nonaudit services provided in the cases if a firm reached "more-cost-effective advice" or if the firm get a higher auditing quality.
On the other hand, Kinney at el (2004) report it this study which empirically investigated the detailed fee for both: restating and non-restating registrants, that they did not find such a statistically positive significant association between the fees of financial information system design and implementation or internal audit services and restatement. It was found however, some association for unspecified nonaudit services and restatement.
A survey study curried out by (Law, P, 2008) empirically examined controversial matter of the non-audit services (NASs), competition, rank as well as the type of auditors in respect of the issue of auditors independence as it relates to the practices by "Big 4" and "non-big 4" auditors in Hong Kong in the post-Enron environment. The empirical finds suggests that the provision of non-audit services in the high competition environment might have such a negative association on "auditors' perception of independence", it is also suggested that such this influence between auditors independence and the provision of NAS depends on "an individual auditor's rand are supported. A further result was reported that in terms of the influence of non-audit serves and the competition on independence, the evidence suggests that there is no different between "big 4" and "non-big 4" auditors' perceptions.
However, as the audit market is being competitive, there are many research papers report that there is evidence suggest that the firms' independent auditors have tend to undercut prices for the purpose of getting a "food in the door" in order to gain the subsequent lucrative non-audit services(Law, P, 2008.; Hussy and Lan, 2002.; Richard, C, 2006). The core concern about the increasing of providing the NAS by auditors that it is based on the assumption that those external auditors are keen to sacrifice their independence in exchange for retaining the audit clients from which they might gain large non-audit services revenues( DeFond at al., 2002.; Law, P, 2008).
Thus, it could be state that it is not surprising that the majority of the empirical studies resulted that providing the clients with the provision of non-audit services had a negative association on the auditor independence ( Shockley, 1981.; Hillison and Kennekkey, 1988; Teoh and Lim, 1996; Beattie et al., 1999., Gendron and Suddaby, 2004; Lindderg and Beck, 2004; Brandon et al, 2004 ;Chien and Chen, 2005; Alleyne et al., 2006; Garey et al., 2006; Richard, 2006). Other researchers investigated this issue and conclude that the auditors' perceptions of independence is positively influenced by the provision of NAS( Bartleet, 1993; Embay and Davidson, 1998; Jenkins, 1999; Windomoller, 2000; Li et al, 2003) Whereas there are some studies have reported their results that the provision of nonaudit services does not affect the auditor independence since that there is no statistical evidence that support the relation between NAS and auditor independence ( Corless and Parker, 1987; Sucher and Bychkova, 2001; DeFond et al., 2002; Quich and Rasmussen, 2005; Francis, J, 2006))
In summary, the debate in the academic literature on the effects of the various components of auditor's compensation on auditor independence has produced mixed results. Some arguments in the literature support the notion of a positive association between auditor independence and compensation. On the other hand, economic dependence of the audit firm on a client may also increase the likelihood that the auditor will acquiesce to management's requests leading to lower quality financial statements.