Effects of provision on non-audit services on audit lag : test of the knowledge spillover hypothesis.

• Main Authors: Low, Jeremy Peng Mun., Lew, Zining., Tse, Man Yee.
• Other Authors: Sharma, Divesh Shankar
• Format: Final Year Project
• Published: 2008
• Subjects: DRNTU::Business::Auditing
• Online Access: http://hdl.handle.net/10356/10035
• Institution: Nanyang Technological University

The Sarbanes Oxley Act prohibits the incumbent auditor from providing certain types of nonaudit services on the grounds that they impair auditor independence. However, the auditing industry argues that it is not socially beneficial, citing the knowledge spillover concept that hypothesizes that the provision of nonaudit services by the incumbent auditor improves the efficiency of the audit. However, neither the profession nor the academic literature provides evidence supporting the knowledge spillover hypothesis. Our study addresses this gap in the literature. Using the economies of scope theory underlying the knowledge spillover argument, we hypothesize that the provision of nonaudit services by the auditor improves audit efficiency. We proxy the provision of nonaudit and audit services using fee data and audit efficiency using audit report lag. This is the first study to use fee and audit lag data to attempt an analysis of knowledge spillover. Our sample comprises 5,495 companies listed on the major stock exchanges in the United States spanning 2000 to 2003 and is the largest sample study on knowledge spillover or audit lag. We find that the provision of nonaudit services is significant and negatively associated with audit lag. This result is robust to various sensitivity tests. This supports our knowledge spillover hypothesis and suggests that the profession may have grounds to argue that the provision of nonaudit services by the auditor influences audit efficiency. The results also suggest that the Sarbanes Oxley Act may have prematurely banned the provision of nonaudit services by the auditor as doing so reduces economic benefits.