Future Recurring NAS and Audit Quality : Evidence from an EU Country

In this paper, we analyze the relationship between future recurring NAS fees and audit quality in the post-SOX era and in a European institutional setting. Prior research suggests that the current amount of NAS fees paid to incumbent auditors does not have a significant negative effect on audit quality. This lack of significance may be due, at least in part, to the fact that almost all empirical research has been conducted on a current year basis, even though it is widely accepted that the auditor-client engagement is an intertemporal relationship. Thus, it seems clear that considering NAS as the source of expected future quasi-rents (future NAS) when analyzing the threats to auditors' independence is a better approach than computing the current year fees. In contrast to previous research, we analyze the association between future recurring NAS and audit quality by dividing NAS into their reported components: tax, audit-related and other services. Taken together, our results support the idea that incumbent auditors consider certain types of recurring NAS as a source of future rents, if these services are expected to grow in the subsequent years. This creates an economic bond between clients and auditors that affects auditor independence when NAS and audit services are provided jointly. Therefore, the conclusions of prior research, which has limited itself to addressing the NAS-audit quality relationship on a current-year basis, need to be reexamined