1.0 Introduction
1.1 Background of Study
The issue of non-audit services provided by auditors, and whether these services have an effect on auditor independence, continues to be controversial (e.g. Hodge and Murray 2012; Mason 2012). Regarding the audit market, most European Member States have high concentration levels even though it has decreased since 2004. Studies calculated on concentration levels of the European statutory audit markets for firms listed on regulated national stock exchange, by turnover, showed that 19 out of 21 Member States are highly concentrated.
Previous studies have argued that recurring and non-recurring non-audit services could have different effects on auditor independence. Schneider et al. (2006) identify empirical work that provides conflicting evidence with some studies suggesting that there are more independence problems for non-recurring non-audit services (Beck et al. 1988a), while others indicate that it is the recurring services that provide the greater independence problem (Beck et al. 1988b; Abbott et al. 2007). The purpose of this study is to examine the effect of recurring and non-recurring non-audit services fees on audit fees in order to explore the issue of non-audit services and the potential loss of independence.
Previous research into the determinants of audit fees generally uses aggregated non-audit fees due to a lack of access to information about recurring or non-recurring services. However, from 1995 onwards, New Zealand companies have been required to disclose the amount paid for non-audit fees in the financial statements and auditors have provided a brief classification of those non-audit services in the audit report. This provides a unique advantage for this study in that information about the type of non-audit services can be identified. We use that data to examine whether companies purchasing recurring non-audit services are different from those that purchase non-recurring non-audit services, or those that do not purchase non-audit services. We then examine which types of service are recurring, and whether either type of non-audit service is associated with lower audit fees.
The core problem associated to non-audit services is its effect on auditors’ independence. For instance, many researchers argue that independence can be threatened by the relationship between the auditor and the audited client when providing non-audit services (Schneider, Church, & Ely, 2006 etc).
1.2 Statement of Problems
Investigation reveals the following problems of the Effects of Non-audit Services on Audit research work;
There is a positive relationship between audit fees and the purchase of both recurring and non-recurring non-audit services at the same time. When two-stage least squares are used to control for joint determination of audit services and non-audit services, there is no relationship. The lack of relationship (or positive relationship) is consistent with previous studies in this area and the results of the non-recurring non-audit services support Beck et al.’s (1988a) suggestion of a lack of incremental bonding.
The issue of non-audit services provided by auditors, and whether these services have an effect on auditor independence, continues to be controversial. This reasoning is convincing when considering the Tesco scandal, since the amount of NAS provided to the company, in exchange with high non-audit fees (NAF) to the auditor, probably had an impact on the extensive auditor tenure. Consequently, this raised awareness to issues regarding auditors’ independence and their capability to encounter long-lasting clients, from which they incur significant amount of income (Harriet, 2014).
1.3 Purpose of Study
The purpose of this study is to investigate the effect of non-audit services on auditor independence, and the importance of non-audit services as a source of income for audit firms in the Nigeria.
1.4 Research Questions
The following are the questions of the research work;
- How do NAS affect auditor independence?
- In what way do different NAS affect auditor independence?
- Is there a difference between companies buying non-audit services and those that do not buy non-audit services?
- Is there a relation between recurring non-audit fees and audit fees?
1.5 Research Hypothesis
The following are the questions of the research work;
Hypothesis One
H0: There is no relation between recurring non-audit fees and audit fees
H1: There is a relation between recurring non-audit fees and audit fees
Hypothesis Two
H0: There is no difference between companies buying non-audit services and those that do not buy non-audit services
H1: There is a difference between companies buying non-audit services and those that do not buy non-audit services
1.6 Scope of Study
The study focuses on the Effects of Non-audit Services on Audit.
1.7 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this institution to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
- Research material: availability of research material is a major setback to the scope of the study.
- Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.8 Significance of Study
The study’s findings are that companies that purchase either type of non-audit services are significantly larger than those that do not purchase non-audit services. Tax services tend to be recurring, while consulting services do not. The results show that recurring non-audit services are positively related to audit fees, while non-recurring non-audit services exhibit no relation to audit fees.
Beside, the study will serve as reference material for subsequent researcher in the field or related topics.
