Non-audit services, audit quality and enforcement - evidence from German enforcement examinations

In this paper, I use privileged data on German enforcement examinations to analyse the association between non-audit service (NAS) fees paid to the statutory auditor and audit quality or auditor independence, respectively. The results show that in the German setting for the years from 2005 to 2012, a period with already tightened regulation on NAS, there is neither a positive nor a negative significant association between NAS fees and enforcement examinations resulting in an error finding. The results do not change when controlling for the specific type of NAS as well as for abnormal NAS fees. Thus, the findings do neither provide support for the occurrence of knowledge spillovers nor do I find evidence indicating that NAS impair auditor independence. However, I find some evidence that the level of audit fees (and total fees) is positively associated with the likelihood of enforcement examinations resulting without a finding of material misstatements. In light of the observable pressure on audit fees in the German market, this is consistent with the notion that higher audit fees may signal higher audit effort.