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Non‐audit Services and Auditor Independence Depending on Client Performance
Author(s) -
Kang Sun Min,
Hwang In Tae,
Hur Kang Sung
Publication year - 2019
Publication title -
australian accounting review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.551
H-Index - 36
eISSN - 1835-2561
pISSN - 1035-6908
DOI - 10.1111/auar.12243
Subject(s) - auditor independence , accounting , audit , business , incentive , independence (probability theory) , purchasing , earnings management , auditor's report , external auditor , earnings , joint audit , audit plan , quality audit , internal audit , marketing , economics , statistics , mathematics , microeconomics
We posit that the effect of non‐audit fees on auditor independence in Korea is based on audit client performance. Further, we suggest that an audit client with low performance has an incentive to purchase non‐audit services (NAS) from an incumbent auditor to facilitate earnings management and steer accounting practices in a preferred direction. We find evidence that as non‐audit fees in Korea increase, auditor independence is reduced only for low‐performing audit clients. Thus, unconditional prohibition of NAS seems unnecessary. Regulators and policymakers should examine the motivation for purchasing NAS, particularly among audit clients with poor performance.