Evidence on the Joint Determination of Audit and Non-Audit Fees

Authors: Whisenant S.¹; Sankaraguruswamy S.²; Raghunandan K.³

Source: Journal of Accounting Research, Volume 41, Number 4, September 2003 , pp. 721-744(24)

Publisher: Wiley-Blackwell

Abstract:

In this study we investigate whether the characteristics of clients, auditors, and the auditor-client relationship simultaneously determine audit and non-audit fees. As done in prior studies, we maintain that fees proxy for the level of service provided and follow the physical flow of knowledge. Estimating single-equation models of audit and non-audit fee models, we confirm prior findings of an association between audit and non-audit fees. Studies conclude that such evidence is consistent with knowledge spillovers between the two services. However, we document empirically that audit and non-audit fees are simultaneously determined. Because the data indicate audit and non-audit fees are jointly determined, we then investigate whether previously documented associations between audit and non-audit fees are the result of biased estimation induced by using endogenous variables in single-equation models. In contrast to results from single-equation estimations, we find no association between audit and non-audit fees using a simultaneous specification of the fee system, suggesting that single-equation estimations suffer from simultaneous-equations bias. In sum, the findings are not consistent with the existence of economies of scope from the joint performance of audit and non-audit services after controlling for the joint behavior of audit and non-audit fees. Given the ongoing debate over the level of allowed non-audit services by auditors, the argument for the joint provision of audit and non-audit services is less justified than if joint-supply benefits had been documented.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/1475-679X.00121

Affiliations: 1: University of Houston 2: Georgetown University and Securities and Exchange Commission (SEC) 3: Florida International University

Publication date: 2003-09-01

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