Non-audit services and knowledge spillovers: An investigation of the audit report lag

Purpose – The accounting profession has argued strongly against claims that the provision of non-audit services to audit clients leads to impaired auditor independence, instead claiming that the joint provision of non-audit services and audit services creates knowledge spillovers that lead to a more efficient audit. This paper seeks to provide evidence concerning knowledge spillovers by examining the association between the audit report lag and non-audit services. Design/methodology/approach – The authors obtained a sample of 260 firm-year observations from the financial reports of New Zealand public companies over the period 2004-2005 and tested for associations between non-audit services and audit report lag, controlling for other variables. Findings – The paper finds evidence that non-audit services are associated with a shorter audit report lag, but that this occurs in a subsequent period, not in the year in which the services are provided. Practical implications – The results suggest that firms purchasing non-audit services from their incumbent auditors benefit from knowledge spillovers by achieving a shorter audit report lag, but not immediately. Originality/value – Previous studies have examined whether there is a relationship between non-audit services and audit report lag in the concurrent period. This paper extends tests to also examine the relationship between NAS in one year and the audit in a subsequent year. These results are more consistent with knowledge spillovers that allow a more efficient audit than they are with loss of independence by the auditor, because loss of independence would take effect immediately, while knowledge spillovers might take time.