The study, undertaken by the International Centre for research in accounting at Lancaster University, found the level of auditor independence fell and auditors were less likely to challenge aggressive financial reporting by companies when they provided non-audit services to the company they audited.
This research will throw new light on the debate on auditor independence following the publication of a European Commission consultative paper, where the issue of non-audit services featured prominently.
However, the study also uncovered an interesting point regarding the magnitude of Big Five non-audit fees, disputing claims made by regulators and other critics of the profession.
The team of researchers found that companies which employed the services of Big Five auditors were slightly more conservative in their earnings management activities, while clients of non-Big Five auditors appeared to engage in high levels of earnings management to meet ratio targets and analyst’ forecasts.
Commenting on this Professor Peter Popse, director of the research, said:
‘Although our research is preliminary and we hope to refine our measurement of earnings management in future research, we believe these first stage results will be of interest to regulators of the auditing profession.’
As far back as 1991, UK fears about the impact of non-audit services on auditor independence, made it a requirement for companies to disclose non-audit fees in their annual accounts.
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