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, and in order to achieve the reliability and objectivity of the financial reports; Auditors have to be fully independently from the audit' client management, as the auditor independence is a fundamental issue (Whittington and Pany, 2002).
However, it has reported increasingly concerns about the more non-audit fees provided to audit clients. The question of does receiving the firms' external auditors larger fees for non-audit services (NAS hereafter) undermine the perceive of the auditor independence?, has received extensive attention from many professional bodies around the world. This might be due to a spate of perceived audit failures in many countries; Enron, WorldCom, and Sunbeam(USA), HIH and OneTel (Australia), Ahold (Netherlands), and Parmalat (Italy) (Francis, 2006; Bloomfield et al, 2008; Law, 2008). Globally, much more concerns have increasingly expressed by the auditing professions, commentators and regulators. This is because that 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 ( Firth, 2002; Griffin and Lont, 2007; Griffin et al, 2009). Furthermore, prior research studies have long been highlighted the provision of NAS as a topic continues to be a controversial issue even though by the additional restrictions imposed by Sarbanes-Oxley Act in 2002 especially after the Enron collapse in the US. As it is stated that the providing audit clients by taxation services is now represent the highest proportion of the fees gained by firms' auditors for non-audit services activities on most audit engagement( Francis, 2006).
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This study aimed to empirically examined the association between the fees of provision of non-audit serves, the fees of audit services, and the perceived of auditor independence in the UK using the financial report data from the FTSE-250 companies over the period between 2004 to 2009 in order to find empirical evidence to statistically support whether the auditor independence influenced by earning more revenues for the fees of NAS.
Due to the separation of ownership and management through the company structure, the latter is responsible for the financial statements that represent the current financial position and past financial performance. Independent external auditors provide assurance against fraud and deliberate misrepresentation of the financial information. This permits stakeholders, including users of the financial statements, to rely on the company's financial statements for their decisions. Thus, auditors are expected to be able to independently decide whether the financial reports of a firm are represent the current financial position, without any influence from the audit clients' management. However, it has widely reported after the case of Enron that Anderson received the amount of $25m as fees of the auditing and $27m for non-audit fees, and therefore, there has been many criticisms about the potential conflict of interest faced by firms' auditors who gain larger non-audit fees from this audit clients( Financial Times, 2001a ) , as the auditor independence can be compromised, and therefore, much more concerns are rapidly expressed about how can auditors remain their independence (Financial Times, 2001b).
Motivation of the study:
It has been increasingly expressed the publicity concerns about the provision of non-audit serves (NAS) by firms' external auditors to audit's clients especially after the Enron collapse in 2002, the core concern based on the fees generated by non-audit services that have been growing more rapidly than audit fees. Thus, this has led to widespread beliefs that the perceptions of auditor independence can be compromised by the increasing of the demand of the provision of NAS. Precisely, there are two main concerns. The first one is that auditors might not be able to stand up to management; this is because they would prefer to gain the additional earnings from providing NAS which is in management's reward. The second one is that providing the management such these services (NAS) might lead the auditors to spot too closely to the management and therefore, their skepticism might be lost as a consequence. Furthermore, NAS might include advisory services such as designing the accounting information system, taxation and accounting services such as bookkeeping. However, due to these concerns about the possible relation between the provision of NAS and the perceptions of auditor independence, this issue is still controversial as it is required more further focusing on it. In addition, another motivation which is considered more important by the researcher's point of view is that this topic is from the researcher's interest as it has been planned to be studied further as a Ph.D topic in the future.
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Aims and Objectives of the study:
As it mentioned before, that the related literature regarding that there are public concerns about the large fees of non-audit services gained by auditors as these concerns focused on the issue of auditor independent as it might be compromised. This study will highlight on FTSE-250 listed companies in the UK which an empirical analyses will be applied. On the other hand, the core objectives of this study is to address whether the auditor independence are being compromised by earning more non-audit fees that audit fees by firms' auditors in the FTSE-250 companies in the UK during the research focusing period (2004-2009). However, there are mixed results have been reported in the related literature. Furthermore, This study aimed to investigate whether if the more providing the provision of non-audit serves by firm's auditor to their audit clients, will influence the perceptions of auditor independence during the auditing period.
Rationale and Justification for the study:
The issue of increasing the amount fess of provision the non-audit services provided bt auditors to their audit clients, is still controversial topic and viewed with scepticism by regulators, as there are more much concerns about if the auditors are be able to remain this independence in such these cases. In the related literature, mixed finds have reported that the majority of prior researches have found that the more providing NAS to auditor clients negatively influenced the auditor independence. For this reason, it is important that it should be more opining research to make possible well-informed policy making by regulators as well as the auditing professional bodies with respect to the charges and gains of restricting the scope of NAS to the audit clients.
The current research study will focus on the FTSE-250 public listed companies in the United Kingdom over the time period from 2003 to 2009, in order to empirically analysis the financial information to gain statistical evidences which can support the research hypothesis of this study. This study aimed to investigate whether if the more providing the provision of non-audit serves by firm's auditor to their audit clients, will influence the perceptions of auditor independence during the auditing period . The related financial information will be analyzed via stata software as the analysis of multiple regression will be used. However, 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 in order to find empirical evidence, with the differences of the research environment.
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.
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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 the controversial matter of 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.