Non-Audit Services and Audit Quality: Recent Evidence from Australia

Most prior studies on non-audit services (NAS) and audit quality in Australia predated the Corporate Law Economic Reform Program Act 2004 (CLERP 9). Australia enacted CLERP 9 to improve corporate governance through the improvement of transparency, accountability, and rights of shareholders. No regulatory changes after CLERP 9 exist that can directly affect the relationship between NAS and audit quality in Australia. Hence, this study examines the effects of NAS on audit quality in Australia. Australian Securities Exchangte (ASX) Listing Rules mandate ASX 300 companies to establish an audit committee and provide a summary of their audit committee charters. The Auditing and Assurance Standards Board (AUASB) prepares standards that govern audits under the Australian Corporations Act. The AUASB auditing standards, under the Legislative Instruments Act 2003, took effect from July 2006. Therefore, this study examines NAS data of ASX 300 companies from 2006 to 2016 - 10 years - to obtain sufficient data. This study has recourse to other databases such as Connect 4, Morningstar, and the companies’ annual reports to gather other relevant data. Three widely accepted measures of audit quality are used, namely going-concern audit opinions, Big Four auditors, and discretionary accruals, to measure the effects of NAS on audit quality. This study excludes initial audit engagements to alleviate the effects of the timing of auditor switches on fees. This research results suggest that NAS do not impair (or even improve) audit quality. This study contributes to the current debate regarding the relationship between NAS and audit quality. Our findings are important to regulators and standard setters, such as the AUASB. Findings inform these bodies that the current regulatory environment safeguards audit quality in Australia. Thus, proposals to ban NAS are not necessary, because NAS do not deteriorate audit quality. Further, this study supports the knowledge spillover hypothesis: it shows that economic and social bonding of NAS does not encourage auditors to sacrifice their independence and reduce their audit quality. Thus, this study suggests that audit firms should continue to provide NAS to their audit clients in Australia. Future research could extend this study by analyzing the effects of different types of NAS on audit quality.