Decomposing Fees Paid to Audit Firms -- Assessing Knowledge Spillovers and Independence

We extend prior studies (e.g., Whisenant et al., 2003; Krishnan and Yu, 2011; Chan et al., 2012) by explicitly utilizing a stringent decomposition of total fee paid for audit services and other services in a sample of listed non-financial Danish companies. When controlling for the joint determination of fees pertaining to the statutory audit and non-audit services, we find support for the existence of positive knowledge spillover from non-audit to audit and the possible independence problems related to this economic bonding. In terms of the non-audit components, the knowledge spillover argument holds for tax services provided. Some support is also found for other services provided, but not for the provision of audit-related services. We also consider the implication of new regulation of the provision of non-audit services in EU countries. From the perspective of maintaining independence, there will be no apparent conflict with continued allowance to provide audit-related services. Prohibiting most tax services and a wide array of other services could have detrimental effect on potential knowledge spillover benefits, while our findings also suggest that the potential for economic bonding could be constrained