Auditing plays a critical function in concern, authorities, and the economical environment. This is because hearers add to the dependability and quality of the fiscal statement of the entities ; hearers can supply to managers and officers constructive observations originating from the audit procedure ; and thereby lend to the effectual operation of concern, capital markets and the populace sector, and in order to accomplish the dependability and objectiveness of the fiscal studies ; Hearers have to be to the full independently from the audit ‘ client direction, as the hearer independency is a cardinal issue ( Whittington and Pany, 2002 ) .
However, it has reported progressively concerns about the more non-audit fees provided to scrutinize clients. The inquiry of does having the houses ‘ external hearers larger fees for non-audit services ( NAS afterlife ) undermine the perceive of the hearer independency? , has received extended attending from many professional organic structures around the universe. This might be due to a batch of perceived audit failures in many states ; Enron, WorldCom, and Sunbeam ( USA ) , HIH and OneTel ( Australia ) , Ahold ( Netherlands ) , and Parmalat ( Italy ) ( Francis, 2006 ; Bloomfield et Al, 2008 ; Law, 2008 ) . Globally, much more concerns have progressively expressed by the auditing professions, observers and regulators. This is because that the proviso of non-audit services by house ‘s external hearers to the audit clients has long been regarded, by regulators in the UK, the US, Australia and assorted other states, as a menace to auditor independency ( Firth, 2002 ; Griffin and Lont, 2007 ; Griffin et Al, 2009 ) . Furthermore, anterior research surveies have long been highlighted the proviso of NAS as a subject continues to be a controversial issue even though by the extra limitations imposed by Sarbanes-Oxley Act in 2002 particularly after the Enron prostration in the US. As it is stated that the supplying audit clients by revenue enhancement services is now represent the highest proportion of the fees gained by houses ‘ hearers for non-audit services activities on most audit battle ( Francis, 2006 ) .
This survey aimed to through empirical observation analyze the association between the fees of proviso of non-audit serves, the fees of audit services, and the perceived of hearer independency in the UK utilizing the fiscal study informations from the FTSE-250 companies over the period between 2004 to 2009 in order to happen empirical grounds to statistically support whether the hearer independency influenced by gaining more grosss for the fees of NAS.
Due to the separation of ownership and direction through the company construction, the latter is responsible for the fiscal statements that represent the current fiscal place and past fiscal public presentation. Independent external hearers provide confidence against fraud and calculated deceit of the fiscal information. This permits stakeholders, including users of the fiscal statements, to trust on the company ‘s fiscal statements for their determinations. Therefore, hearers are expected to be able to independently make up one’s mind whether the fiscal studies of a house are stand for the current fiscal place, without any influence from the audit clients ‘ direction. However, it has widely reported after the instance of Enron that Anderson received the sum of $ 25m as fees of the auditing and $ 27m for non-audit fees, and hence, there has been many unfavorable judgments about the possible struggle of involvement faced by houses ‘ hearers who gain larger non-audit fees from this audit clients ( Financial Times, 2001a ) , as the hearer independency can be compromised, and hence, much more concerns are quickly expressed about how can auditors stay their independency ( Financial Times, 2001b ) .
Motivation of the survey:
It has been progressively expressed the promotion concerns about the proviso of non-audit serves ( NAS ) by houses ‘ external hearers to scrutinize ‘s clients particularly after the Enron prostration in 2002, the nucleus concern based on the fees generated by non-audit services that have been turning more quickly than audit fees. Therefore, this has led to widespread beliefs that the perceptual experiences of hearer independency can be compromised by the increasing of the demand of the proviso of NAS. Precisely, there are two chief concerns. The first 1 is that hearers might non be able to stand up to direction ; this is because they would prefer to derive the extra net incomes from supplying NAS which is in direction ‘s wages. The 2nd 1 is that supplying the direction such these services ( NAS ) might take the hearers to descry excessively closely to the direction and hence, their incredulity might be lost as a effect. Furthermore, NAS might include consultative services such as planing the accounting information system, revenue enhancement and accounting services such as clerking. However, due to these concerns about the possible relation between the proviso of NAS and the perceptual experiences of hearer independency, this issue is still controversial as it is required more farther focussing on it. In add-on, another motive which is considered more of import by the research worker ‘s point of position is that this subject is from the research worker ‘s involvement as it has been planned to be studied farther as a Ph.D subject in the hereafter.
Purposes and Aims of the survey:
As it mentioned before, that the related literature sing that there are public concerns about the big fees of non-audit services gained by hearers as these concerns focused on the issue of auditor independent as it might be compromised. This survey will foreground on FTSE-250 listed companies in the UK which an empirical analyses will be applied. On the other manus, the nucleus aims of this survey is to turn to whether the hearer independency are being compromised by gaining more non-audit fees that audit fees by houses ‘ hearers in the FTSE-250 companies in the UK during the research concentrating period ( 2004-2009 ) . However, there are assorted consequences have been reported in the related literature. Furthermore, This survey aimed to look into whether if the more supplying the proviso of non-audit serves by house ‘s hearer to their audit clients, will act upon the perceptual experiences of hearer independency during the auditing period.
Rationale and Justification for the survey:
The issue of increasing the sum fess of proviso the non-audit services provided bt hearers to their audit clients, is still controversial subject and viewed with agnosticism by regulators, as there are more much concerns about if the hearers are be able to stay this independency in such these instances. In the related literature, assorted discoveries have reported that the bulk of anterior researches have found that the more providing NAS to auditor clients negatively influenced the hearer independency. For this ground, it is of import that it should be more opining research to do possible intelligent policy devising by regulators every bit good as the scrutinizing professional organic structures with regard to the charges and additions of curtailing the range of NAS to the audit clients.
The current research survey will concentrate on the FTSE-250 populace listed companies in the United Kingdom over the clip period from 2003 to 2009, in order to through empirical observation analysis the fiscal information to derive statistical groundss which can back up the research hypothesis of this survey. This survey aimed to look into whether if the more supplying the proviso of non-audit serves by house ‘s hearer to their audit clients, will act upon the perceptual experiences of hearer independency during the auditing period. The related fiscal information will be analyzed via stata package as the analysis of multiple arrested development will be used. However, the surveies published by Li et Al. ( 2003 ) and Ahmad et Al. ( 2006 ) resemble this survey most closely, since they besides straight use both: audit and non-audit fees in order to happen empirical grounds, with the differences of the research environment.
Auditor independency and the proviso of non-audit services ( NAS )
The controversial issue of supplying of non-audit services by houses ‘ hearer to the audit clients has been recognized for a long clip by many professional organic structures ( Gul et al 2007 ) . NAS are by and large considered as any another services achieved by houses ‘ external hearer which the hearer provides such a services to the directors to better the concern public presentation, as these services classified as book-keeping, direction consultative service ( MAS ) , internal audit services, revenue enhancement and other legal advisory and planing the fiscal information system ( Arens et Al ; Alleyne et Al, 2006. ; Arens et Al, 2008. ; Law, P 2008 )
In footings of the issue of non-audit consultative services and its consequence on hearer independency, there are legion surveies that investigate whether there is a relation between NAS provided by house ‘s external hearers and hearer independency. However,
On the other manus, there are many research documents report that the proviso of NAS does non act upon on hearer independency ( Jenkins and Krawczyk, — ) . A survey carried out by Mckinley, Pany, and Reckers ( 1985 ) indicated that supplying such non-audit service like consultative service to better a house ‘s public presentation by bettering its internal control system, did non well act upon the dependability of fiscal statement and hearer independency hence. Another survey by Pany, and Reckers ( 1988 ) show that increasing the degree of direction advisory services ( MAS ) does non impair the trust of fiscal studies and the hearer independency as a effects. A alteration of 20 twelvemonth empirical research survey done by Kinney ( 1999 ) states that there is no important grounds that there is a rise concern by investors based on high degree of NAS provided by house ‘s hearers. Wallman ( 1996 ) besides found little empirical grounds that hearer independency impairs by NAS.
Harmonizing to Craswell ( 1999 ) In a few figure of surveies, the impact of nonaudit services on hearer ‘s coverage determinations has been investigated in order to measure the prospective hazard that hearers might non hold acted independently. For illustration, Barkess and Simnett ( 1994 ) ; Wines ( 1994 ) ; and Craswell ( 1999 ) through empirical observation investigate the association between NAS and hearer ‘s coverage determinations by utilizing promotion available information in Australia. The advantages of these surveies could be that their grounds are related to the impacts on hearer independency. However, the consequences of these surveies are assorted ; while Wines states an relationship, Barkess and Simnett, and Craswell were their discoveries that the grounds suggests that hearer independency measured by hearer ‘s coverage determinations are non associated by the proviso of nonaudit services. Furthermore, An drawn-out analysis survey done by Beck et Al. ( 1988 ) which through empirical observation investigate the articulation supply of nonaudit services and scrutinizing by separating both characteristic of NAS: recurring and non-recurring. However, they it has been argued in this survey that cognition spillovers ensuing from repeating NAS have the influence of cut downing the menace to auditor independency, whereas the contradictory consequence is experienced with non-recurring nonaudit services.
In a widely cited survey done by Frankel et Al ( 2002 ) utilizing a big sample of US informations based on the house ‘s fiscal coverage during the period between February and June 2001, in order to look into the association between three placeholders for the independency of house ‘s hearers “ ( net incomes direction ) ” and a placeholder the purchase of nonaudit services. A important positive association has been found between gaining direction and the buying of the proviso of NAS. They suggest that increasing the acquisition of nonaudit services can compromise the hearers ‘ independency. However, Cahan et Al ( 2008 ) province that the survey finds in Frankel et Al ( 2002 ) has been criticized by many recent surveies. For illustration, Kinney and Libby ( 2002 ) argue that the consequences survey of Frankel et Al. are rather complicated to construe due to restriction of assorted used, as there few jobs in a comprehendible definition based on “ the conceptual dealingss between direction and hearer inducements and net incomes direction ” every bit good as some statistical issues. However, in footings of turn toing some of these concerns, more recent surveies have investigated this issue ( the association between NAS and the independency of hearers ) and it has been found that the relationship between the pushasing of nonaudit services and the audit independency is either significantly negative association ( Antle et al. , 2006 ) or non important ( Reynolds et al. , 2004 ; chung and Kallapur, 2003 ; Ashbaugh et al. , 2003 ) . However, Frankel et Al found that there is a positive association between the two variables mentioned above.
Defond et Al. ( 2002 ) investigate in their survey the issue of whether hearer independency compromised by NAS, base on the proxy statement in the field of SEC during the period from February 2001 to December 2001 by analysing a big sample of 4, 105 houses. The discoveries suggest that there is no important relationship between the impaired hearer independency and nonaudit services fees, Furthermore, it has besides been reported in this survey that there is no association has found between audit fees and going- concern sentiments. However, their discoveries are consistent with market-based inducements, such as repute and judicial proceeding losing cost, ruling the expected benefits from compromising hearer independency.
A semi-structured interviews and mail questionnaire survey curried out by Caning and Gwilliam ( 1999 ) investigates the associations of the proviso of nonaudit on the independency of hearers based on the Irish commercial environment, as the survey ‘s environment was non antecedently investigated such survey for this intent. The survey studies that the chief cardinal findings were that “ perceptual experiences ” of hearer independency were significantly impaired when the proviso of nonaudit services was provided to auditor ‘s clients by personal engagement in scrutinizing procedure instead than either scrutinizing a section individually whiten the house ‘s audit or to supply NAS clients merely. However, this survey focused on the fiscal statement ‘s users who were acute to accept such a decrease in the independency of their hearers resulted upon the nonaudit services provided in the instances if a house reached “ more-cost-effective advice ” or if the house acquire a higher auditing quality.
On the other manus, Kinney at EL ( 2004 ) study it this survey which through empirical observation investigated the elaborate fee for both: restating and non-restating registrants, that they did non happen such a statistically positive important association between the fees of fiscal information system design and execution or internal audit services and restatement. It was found nevertheless, some association for unspecified nonaudit services and restatement.
A study survey curried out by ( Law, P, 2008 ) through empirical observation examined the controversial affair of non-audit services ( NASs ) , competition, rank every bit good as the type of hearers in regard of the issue of hearers independency as it relates to the patterns by “ Large 4 ” and “ non-Big 4 ” hearers in Hong Kong in the post-Enron environment. The empirical discoveries suggests that the proviso of non-audit services in the high competition environment might hold such a negative association on “ hearers ‘ perceptual experience of independency ” , it is besides suggested that such this influence between hearers independency and the proviso of NAS depends on “ an single hearer ‘s rand are supported. A farther consequence was reported that in footings of the influence of non-audit serves and the competition on independency, the grounds suggests that there is no different between “ large 4 ” and “ non-big 4 ” hearers ‘ perceptual experiences.
However, as the audit market is being competitory, there are many research documents report that there is grounds suggest that the houses ‘ independent hearers have tend to undersell monetary values for the intent of acquiring a “ nutrient in the door ” in order to derive the subsequent moneymaking non-audit services ( Law, P, 2008. ; Hussy and Lan, 2002. ; Richard, C, 2006 ) . The nucleus concern about the increasing of supplying the NAS by hearers that it is based on the premise that those external hearers are acute to give their independency in exchange for retaining the audit clients from which they might derive big non-audit services grosss ( DeFond at al. , 2002. ; Law, P, 2008 ) .
Therefore, it could be province that it is non surprising that the bulk of the empirical surveies resulted that supplying the clients with the proviso of non-audit services had a negative association on the hearer independency ( Shockley, 1981. ; Hillison and Kennekkey, 1988 ; Teoh and Lim, 1996 ; Beattie et al. , 1999. , Gendron and Suddaby, 2004 ; Lindderg and Beck, 2004 ; Brandon et Al, 2004 ; Chien and Chen, 2005 ; Alleyne et al. , 2006 ; Garey et al. , 2006 ; Richard, 2006 ) . Other research workers investigated this issue and conclude that the hearers ‘ perceptual experiences of independency is positively influenced by the proviso of NAS ( Bartleet, 1993 ; Embay and Davidson, 1998 ; Jenkins, 1999 ; Windomoller, 2000 ; Li et Al, 2003 ) Whereas there are some surveies have reported their consequences that the proviso of nonaudit services does non impact the hearer independency since that there is no statistical grounds that support the relation between NAS and hearer independency ( Corless and Parker, 1987 ; Sucher and Bychkova, 2001 ; DeFond et al. , 2002 ; Quich and Rasmussen, 2005 ; Francis, J, 2006 )
In drumhead, the argument in the academic literature on the effects of the assorted constituents of hearer ‘s compensation on hearer independency has produced assorted consequences. Some statements in the literature support the impression of a positive association between hearer independency and compensation. On the other manus, economic dependance of the audit house on a client may besides increase the likeliness that the hearer will assent to direction ‘s petitions taking to lower quality fiscal statements.