Non-audit services demand and industry specialist auditors

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NO FULL TEXT AVAILABLE. Access is restricted indefinitely. ----- This paper examines the relationship between auditor industry specialization and the non-audit services (NAS) they provide to their auditees. It draws on the role that auditor industry specialists (AIS) have in client acceptance decisions to reduce audit risk, the existence of knowledge spillovers between NAS and auditing services, the capacity of AIS to deal with complex tasks related to client industry characteristics and to generate economies of scope. I shed some light on the demand side factors that lead clients to demand “more audit-related NAS” (AR-NAS) from their incumbent auditors such as client risk, size and complexity and consider the supply factors that create opportunities for auditors who are industry specialists to provide AR-NAS to their clients. With the audit information, being a common input that could create economies of scope when audits and NAS are jointly provided and the AIS having industry-specific audit information not available to non-auditor industry specialists (NAIS), I expect that the more audit-related the non-audit services, the more prevalent the economies of scope will be in joint supply of these NAS and audit services. I expect the fees for AR-NAS provided by the AIS to be lower than the fees charged by NAIS due to the cost savings generated by the joint provision of audits and AR-NAS by AIS. I argue too that the industry specific audit knowledge and the knowledge acquired during the provision of AR-NAS could be useful to detect opportunities to supply a greater range of “less audit- related NAS” (NAR-NAS). But, when the NAS in demand by the client become less audit- related, the opportunity for AIS to generate knowledge spillovers declines reducing the opportunities for generating economies of scope across audits and NAS. The overall key findings are that AIS provide a greater range (between 60% and 152% more) of AR-NAS than NAIS and they charge lower fees (between 8.15% - 15.72% lower) than NAIS for these services. The results also suggest that AIS use some of the knowledge acquired during the provision of the AR_NAS to provide more of the NAR-NAS to their clients than NAIS but they charge similar fees for NAR-NAS compared to NAIS.
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