The strategic role of Non-audit Services in Audit Markets

Abstract

There has been an extensive debate about whether the joint provision of audit and non-audit services (NAS) impairs auditor independence and objectivity. Literature suggest that joint delivery of the audit and NAS may generate knowledge spillover effects that could lead to economic rents, integrity and increased audit quality. We model that markets are better off when audit firms provide NASs together where firms are indifferent between the benefits of economic rents and the independence costs. The findings have implications for audit profession, regulators and policy makers such as PCAOB deliberation over whether additional NAS should be banned or relaxed for auditors.