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The provision on non-audit services by auditors: Let the market evolve and decide

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Abstract

The provision of non-audit services by auditors to their audit clients reduces total costs, increases technical competence and motivates more intense competition. Furthermore, these services do not necessarily damage auditor independence nor the quality of non-audit services. This assessment leads to recommending that legislative policy should aim at facilitating the development and use of the safeguards provided by the free action of market forces. Regulation should thus aim to enable the parties-audit firms, self- regulatory bodies and audit clients-to discover through competitive market interaction both the most efficient mix of services and the corresponding quality safeguards, adjusting for the costs and benefits of each possibility. Particular emphasis is placed on the role played by fee income diversification and the enhancement, through disclosure rules, of market incentives to diversify.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 423.

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Date of creation: Jun 1999
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Handle: RePEc:upf:upfgen:423

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Web page: http://www.econ.upf.edu/

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Keywords: Auditing; professional services; non-audit services; multidisciplinary firms;

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References

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  1. DeAngelo, Linda Elizabeth, 1981. "Auditor independence, `low balling', and disclosure regulation," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 3(2), pages 113-127, August.
  2. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  3. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 5(1), pages 179-194, April.
  4. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 24(3), pages 461-83, December.
  5. Michael Firth, 1997. "The Provision of Non-audit Services and the Pricing of Audit Fees," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 24(3), pages 511-525.
  6. Gaver, Jennifer J & Gaver, Kenneth M, 1995. " Simultaneous Estimation of the Demand and Supply of Differentiated Audits," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 5(1), pages 55-70, March.
  7. Grossman, S J & Hart, O D, 1980. " Disclosure Laws and Takeover Bids," Journal of Finance, American Finance Association, American Finance Association, vol. 35(2), pages 323-34, May.
  8. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 3(3), pages 183-199, December.
  9. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 615-41, August.
  10. Maria Antonia Garcia-Benau & Christopher Humphrey, 1992. "Beyond the audit expectations gap," European Accounting Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 1(2), pages 303-331.
  11. Fishman, Michael J & Hagerty, Kathleen M, 1990. "The Optimal Amount of Discretion to Allow in Disclosure," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(2), pages 427-44, May.
  12. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 21(2), pages 297-326, October.
  13. Dye, Ronald A, 1986. "Proprietary and Nonproprietary Disclosures," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(2), pages 331-66, April.
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Cited by:
  1. Ojo, Marianne, 2009. "Regulating non audit services: Towards a principles based approach to regulation," MPRA Paper 19408, University Library of Munich, Germany.
  2. Juan Monterrey Mayoral & Amparo Sánchez-Segura, 2007. "Rotación y dependencia económica de los auditores: sus efectos sobre la calidad del resultado en las compañías cotizadas españolas," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 31(1), pages 119-159, January.
  3. D'Agosto, Elena, 2007. "Auditing Issues across Countries: an Explorative Approach to the Regulation Framework," MPRA Paper 50989, University Library of Munich, Germany.
  4. Siti Subaryani Binti Zainol & M. Krishna Moorthy & Tengku Rahimah Binti Tengku Arifin, 2012. "Determinants of Non-Audit Services in Malaysia: A Theoretical Model," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(3), pages 97-111, July.

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