Provision of Non-audit Services by Auditors: Economic Efficiency or Managerial Opportunism?

This paper examines the relative importance of proxies for economic efficiency and managerial opportunism as determinants of non-audit services (NAS), and thereby contributes to the debate on whether the provision of NAS by auditors impairs independence or is economically efficient. We find that NAS is positively related to auditor tenure, and clients purchase more NAS from industry-specialist auditors, suggesting that economic efficiency factors are associated with NAS purchases. To examine managerial opportunism we use proxies for the strength of corporate governance (percentage of independent directors on the board and audit committee, board and audit committee size, and number of board and audit committee meetings) and client incentives to manage earnings (CEO ownership, bonus and stock compensation, and leverage). While the statistically significant coefficients on board independence and bonus and stock compensation are consistent with managerial opportunism (firms with less independent boards purchase more NAS, and firms with more bonus and stock compensation purchase more NAS), those on audit committee size and number of board meetings are inconsistent with managerial opportunism, but consistent with efficient contracting (firms with larger audit committees and with less frequent board meetings purchase less NAS). Overall, the sum of the managerial opportunism variables does not differ significantly from zero. Thus we conclude that the evidence is consistent with NAS purchases being driven by economic efficiency rather than managerial opportunism