Further evidence on knowledge spillover and the joint determination of audit and non-audit fees

Purpose – For more than 25 years auditing research has examined whether knowledge spillovers or synergies exist from the joint provision of audit and non-audit services as well as whether the audit client benefits from knowledge spillovers. However, empirical evidence on knowledge spillover remains mixed and elusive. This article seeks to contribute to this debate, using a large sample covering both the pre- and the post-Sarbanes-Oxley Act (SOX) era. A post-SOX focus can be potentially informative because SOX has fundamentally changed the mix of audit and non-audit services that can be offered to audit clients. Design/methodology/approach – A two-stage least squares regression model is used to control for simultaneous bias due to the joint determination of audit and non-audit fees. A panel dataset is also used. Findings – A strong and significant negative relationship is found between audit fees and non-audit fees. The results suggest that knowledge spillover flows from non-audit to the audit side, as well as from the audit side to the non-audit side. For the overall sample, a 1 percent increase in non-audit fees is associated with a 0.59 percent decrease in audit fees. Similarly, a 1 percent increase in audit fees is associated with a 0.49 percent decrease in non-audit fees. Research limitations/implications – Though a comprehensive set of determinants of audit and non-audit fees is used, it is possible that the model may not include some other unknown determinants of fees paid to auditors. Practical implications – The study contributes to the debate on whether regulators should ban all non-audit services. It is found that when the same audit firm performs both audit and non-audit services, there are synergies, i.e. insight learned from performing one function helps the other. Social implications – At the economy level, the findings suggest that cost savings, due to knowledge spillover, are partly passed on to the clients, particularly by Big 4 auditors. Originality/value – The findings on the existence of knowledge spillover in the post-SOX era are potentially informative to regulators, auditors, audit clients, and audit committee members.