Further Evidence on Knowledge Spillover and the Joint Determination of Audit and Non-Audit Fees

For more than twenty-five 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. We contribute to this debate using a large sample covering both the pre- and the post-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. We find a strong and significant negative relationship between audit fees and non-audit fees. Our 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% increase in non-audit fees is associated with a 0.59% decrease in audit fees. Similarly, a 1% increase in audit fees is associated with a 0.49% decrease in non-audit fees. our findings suggest that cost savings due to knowledge spillover are partly passed on to the clients, particularly by Big 4 auditors