The Effect of Prohibiting Non-Audit Services on Auditor Independence of Mind in the United Kingdom

Abstract

Financial market regulators responsible for protecting investors' interests have long debated the non-audit services (NAS) provided by auditors and how they impact auditor independence. In addition to audit examinations, audit firms often provide clients with NAS such as tax services, litigation support services, accounting services, recruitment and remuneration services and others. Due to increasing globalisation, new technologies and the growth of multinational corporations, there has been a significant increase in demand from public and private organisations in recent years. The European Commission (EC) introduced regulations on 16th June 2014 prohibiting specific NAS for public interest entities (PIEs) in response to the financial crisis. Also, the total annual NAS fee was capped at 70% of the three-year audit fee average. Member states, including the UK, adopted the measures before leaving the EU. Yet only a few studies have evaluated the necessity of increased restrictions on specific NAS and the fee cap ratio, especially in the European and UK contexts. Furthermore, only a few studies have examined the research phenomenon in the private sector. Using quantitative archival data from the annual reports of listed companies and private firms of public interest from 2010-2019, this study investigates whether the provision of NAS affects auditor independence of mind with evidence from the UK. As the UK was a member of the EU until 31st January 2020, it represented a substantial share of the European market. Compared to the USA, where most previous studies were conducted, auditors face low litigation risk and regulatory oversight is modest in the UK. The study also focuses on publicly listed and private companies of public interest. To empirically investigate the research phenomenon, this present study used discretionary accruals to measure auditor independence of mind, and the amount paid to auditors for NAS as the measurement of NAS fees. The study concludes that auditor independence of mind has a positive relationship with NAS fees and no relationship with specific NAS fees, and the 70% fee cap rate of publicly listed firms and public interest businesses. The study provides regulators with the necessity and effectiveness of the reforms related to the provision of NAS and auditor independence. This includes restrictions on specific NAS and NAS fee caps. It adds fresh empirical insight to the growing NAS and auditor independence literature. In addition, it informs regulators about their consideration of restricting NAS provision for private firms in the UK.

Date of Award	2024
Original language	English
Supervisor	Jonathan Evans (Supervisor) & Brian Telford (Supervisor)