EC Proposal of Audit-Only Firms : Discussing the Potential Effects of Breaking the 'Audit Oligopoly' on Accounting and Audit Quality

This article discusses the interdiction of combining audit and not audit services by the external auditor, which the EU Commission (EC) is presently discussing as reform measures in its regulation draft of November 30, 2011. According to an agency-theoretical definition of the auditor's function within corporate governance, results of the empirical audit research on the effects of an auditor's combined audit and non audit services on accounting and audit quality are laid out in a state-of-the-art analysis to give a policy advice. We analyze, whether the interdiction of combining audit and non audit services has a negative impact on the quality of financial accounting and audit as EC assumes. For this purpose a selection of variables for approximate rating of the quality of financial accounting (earnings management, restatements, market reactions) and the quality of external audit (going concern opinions) will be used. So far, research suggests an inconsistent image mainly in the U.S. capital market. Therefore a negative impact of an auditor's offering audit and non audit services on the quality of accounting and audit can mainly only be concluded by few variables (earnings management, market reactions). Those studies, which use restatements and going concern opinions as a proxy for accounting and audit quality, come to inconsistent results. Consequently, the benefit of the reform presently discussed by the EC is arguable. Moreover, so far there are only a few empirical studies for the EU member states analyzing the impact of combined audit and non audit services, thus providing evidence for the necessity of this course of action