Do non-audit services influence audit quality?

Whether joint supply of NAS and audits influences audit quality has been a concern of many parties including SEC, investors, and critics of audit profession. Prior studies, however, have found conflicting results and no definite conclusions can be drawn on impacts of NAS on audit quality. Unlike previous studies, this study does not consider NAS to have an unidirectional linear effect on audit quality. Immaterial NAS is not likely to have significantly negative effects on auditor independence and may have positive impacts on audit quality because of “knowledge spillover”, especially for firms with short auditor tenure. Considering both the magnitude of NAS and auditor tenure effects allows this study to incorporate possibility that NAS can improve auditor competence. This study also differentiates “actual” audit quality from “appearance” audit quality by testing possibility that investors' perception of audit quality may differ from actual audit quality. Finally, this study tests impacts of NAS on audit quality by comparing audit quality before and after Sarbanes-Oxley Act (SOX), which prohibits auditors from providing most NAS to their audit clients. If passage of SOX does indeed improve audit quality, the most noteworthy effect should be present for those firms who previously purchased large amounts of NAS. Overall, empirical results of this study fail to find positive effects of NAS, through knowledge spillover, on audit quality, but find negative effects of NAS as measured by both actual and appearance proxies of audit quality. With regard to tests for effectiveness of prohibiting NAS, this study finds a moderate result that changes in financial reporting quality, after implementing SOX, vary depending on NAS purchases prior to the Act. However, there seems to be no difference in changes of perceived audit quality between firms with large NAS purchases and firms with small NAS purchases.