The cost of audit qualifications: the role of non-audit services

• Published in: Journal of international accounting, auditing & taxation auditing & taxation, 1999, Vol.8 (2), p.215-240
• Main Authors: Houghton, K.A, Jubb, C.A
• Format: Article
• Language: English
• Subjects: Accounting; Accounting firms; Audit engagements; Audit Fees; Audit Qualification; Auditing; Auditors opinions; Audits; Financial services; Market for Audit Services; Non-Audit Service Fees; Occupational qualification; Payments; Production costs; Professional fees; Regression analysis; Studies
• ISSN: 1061-9518; 1879-1603
• DOI: 10.1016/S1061-9518(99)00014-2

This study argues that the incremental audit production costs associated with issuing a qualified opinion are difficult for public accounting firms to recoup through audit fees alone. It proposes that audit production costs associated with qualifications may be recouped through non-audit service (NAS) fees in addition to audit fees. Further, it proposes that such recoupment follows a differential timing pattern. Audit fees, because of their more constrained nature, are more likely to be elevated as a consequence of qualification presence in the year subsequent to the qualification. On the other hand, NAS fees, by virtue of their very nature and more flexible billing opportunities provided, are likely to be so affected in the year concurrent with the qualification. The research is based on Australian data, as there are few jurisdictions in the world that require disclosure of both audit and non-audit fees. Using a sample of 270 companies, a significant and positive association is found between the presence of an audit qualification and significantly higher fees paid. This relationship holds both in the case of an audit qualification contemporaneous with the fee charged, and of one occurring in the year preceding the disclosed fee(s). The effect on audit fees, however, occurs only on a lagged opinion basis, while the effect on NAS fees occurs only on a concurrent opinion basis.