The company jurisprudence in the UK is really rigorous for the hearers due to the demand: unity and independency ( Porter, 1996 ) . In add-on, the Enron Collapse brings a daze in the auditing profession industry, which is merely like an dismay and warn the hearers in the hereafter. Consequently, most of the scrutinizing regulators such as APB set the elaborate criterions for modulating the ethical activities of the hearers.
The one of the grounds for the Arthur Andersen ( AA ) bankruptcy is the high non-audit fees than audit fees ( Chen and Chein, 2005 ) . Equally, the Northen Rock ‘s prostration has the same ground as the AA and the proportion of the NASF is highly high ( Walker and Pierce, 1988 ) .
All of these dirts illustrate a job that whether the proviso sum of NAS will impact the hearer independency and if the high ratio of NASF ( NASF/Total of AF ) will impair the hearer independency. Fortunately, many research workers conducted a batch of surveies in this country so as to supply a solid platform for easing this connotation in scrutinizing industry.
The intent of this article is to look into the relationship between NAS provided by the auditing houses and hearer independency and the inclination and the job of NASF earned by the auditing houses. Based on these old surveies, this article will give some suggestions for future research and atone for the scrutinizing mechanisms ‘ demerits. Furthermore, there are two grounds for reexamining the hearer independency and NAS. On the one manus, the infinite of this literature reappraisal is limited. On the other manus, the argument on the hearer independency and proviso of NAS exerts a far-reaching influence on scrutinizing quality and give the public much nutrient for idea after these accounting dirts.
The mind-map of literature reappraisal was explained as followed:
2. What is Auditor Independence
Professional Accounting Association ( PAA ) and many authorities regulative bureaus in the worldwide have stressed that hearer independency is both an ethical and a professional issue, which is important for hearers sing the regulations set by AICPA and SEC as professional creed ( Antle, 1984 ; Mednick, 1990 ; Hayes et al. , 1999 ) . Similarly, some surveies explicit the contents of hearer independency through analysing the Code of Ethics1issued by IFCA in the ISA200 ( Glodman and Barlev, 1974 ; Millichamp, 1996 ; Wallman, 1996 ; Arens and loebbecke, 1997 ) . Furthermore, there is a convergent definition which is that independency is ‘free of any influence ‘ ( Lee, 1972, p.68 and Bazerman et al. , 1997, p.90 ) and ‘free of any prejudice ‘ ( AICPA & A ; ICAA, 1992 ) . While, the scrutinizing industry normally use the definition of APB as followed:
“ Independence is the freedom from state of affairss and relationships which make if likely that a sensible and a informed 3rd party would reason that objectiveness either is impaired or could be impaired ‘ ( APB, 2004, p.6 ) .
Mautz and Sharaf ( 1966 ) pointed the spread between hearer independency in fact and in visual aspect, which is comparatively stiff dimension about hearer independency. They stated that hearer independency in fact is no utile when people who read the hearer study and do non believe independency ‘s being. Particularly, Fearnley et Al. ( 1999 ) extents the Mautz and Sharaf ‘s work by exemplifying the interrelatedness between independency in fact and visual aspect graphically. The charts as follows:
Figure 1 Relationship between independency in fact and independency in visual aspect
‘
Beginning: ( Fearnley et al. , 1999 ) .
Additionally, they summarize the effects and precautions of independency in fact by look intoing the UK, Austria, New Zealand and other states ‘ surveies ( see Appendix 5 ) . Otherwise, some bookmans divide hearer independency into practician independence2 and professional independence3 ( see appendix 6 ) ( Flint, 1988 ; Dunn, 1996 ; Gray and Manson, 2000 ; Stevenson, 2002 ; Dopuch et.al. , 2003 ) .
In pattern, the entirely independent is difficult to accomplish during the procedure of scrutinizing and hard to keep extremely audit quality. Most of times, the populace do non swear in the hearer ‘s independent in visual aspect even though they are independent in fact ( Fearnley et.al. , 2005 ; Hudib et.al. , 2006 ) . Knapp ( 1985 ) and Arrunada ( 1999 ) highlight the hearer independency will be comprised by the menaces ( see Appendix 7 ) and concentrates on the precautions related to these menaces. Although they adopt the context-based research method to research the independency menaces in the UK and US, they fail to see the other states ‘ state of affairs. Yet, other research workers are cognizant of this point and get down to look into some states such as Hong Kong, Malaysia and Canada ( Gul and Tsui, 1992 ; Teoh and Lim, 1996 ; Gorman and Ansong, 1998 ) . Harmonizing to the above result of researches, they have a common feature that is their research base on look intoing the auditor-client relationship.
3. Conflicts of Interest: The Case of Provision Non Audit Servicess
After a series of accounting dirts ( the list of accounting dirts in Appendix 8 ) , proviso NAS becomes a controversial country. Enron Case sounded the dismay in the auditing industry and APB set the regulations to modulate the auditing houses ‘ proviso NAS to their clients ( APB, 2004 ) . Most EU states ban certain NAS ( Lennox, 1999 ) and permitted as followed ( Figure 2 ) :
Tax services will usually incorporate readying of corporation revenue enhancement, which is non a job country ; job generates when the hearer gets involved in the executors personal revenue enhancement personal businesss that would take them to familiarity menace ( Lassila et al. , 2010 ) . Therefore, the auditor-client relationship will be near which involved the conflict-interest of managers. A full list of recommended intervention of NAS is included in the appendix 9 ) . The anterior researches ( Selmrod and Blumenthal, 1996 ; Mills et al. , 1998 ; Omer et al. , 2006 ) show that there is an addition inclination of supplying revenue enhancement services to client and these client companies would wish to retain the revenue enhancement services by their old hearers. Further, a batch of research workers question that whether proviso NAS will impair the hearer independency ( Simunic, 1984 ; Lafound et al. , 2003 ; Krishnan et al. , 2005 ; Francis, 2006 ; Schneider et al. , 2006 ) . The consequences are assorted. Some writers believe that proviso NAS will impair the hearer independency ( Firth, 1980 ; Parkash and Venable, 1993 ; Francis, 2006 ) . Conversely, other bookmans province that proviso NAS will non consist the hearer independency but benefit for the hearers ( Simnett, 1994 ; Arrunada, 1999 ; Frankel et al. , 2002 ) . Based on the argument, it will bring forth two observations for unknoting the NAS ‘ mystery.
3.1 Observation one: The statements against the Provision of NAS
A batch of surveies acknowledge that supplying NAS endanger the hearer independency and show that offering NAS impair the hearer independency in the undermentioned ways ( Deberg et al. , 1991 ; Defond et al. , 1992 ; Firth, 1997 ) .
3.1.1The Economic Bonding
The economic bonds refer to the relationship between the hearer and the client, which will be increased by offering the NAS ( DeAngelo, 1981 ) . Then, legion research workers find that this economic bonding will endanger the hearer independency ( DeAngelo, 1981 ; Firth, 1997 ; Francis et al. , 1999 ; Kinney et al. , 2004 ) . In order to salvage infinite, the literature reappraisal related economic bonds chiefly can be classified into three parts ( auditor-provided non-audit services, future economic involvements and purchase audit services and NAS jointly ) . These three factors of economic bonds ( the relationship and construction in the Figure 3 ) will be illustrated why the economic bonds impair the hearer independency and how the economic bonds impact on the hearer independency.
Figure 3 Relationships and Structure of Economic Bond ( self-design )
3.1.1.1 Provision of NAS and hearer independency
Many writers believe that the hearer get involved in supplying NAS originate the job of hearer independency ( in existent or in visual aspect ) damage ( Mautz & A ; Sharaf, 1961 ; Burton, 1980 ; Beck et al. , 1988 ) . Furthermore, DeAnglo ( 1981 ) argues that proviso the NAS will damage the hearer independency when the hearer provide the NAS with an extra rent paid by the client. In this instance, the independence-impairing will be happened because the hearers have a willing to supply the moneymaking study for those client-companies. In add-on, DeAnglo ( 1981 ) find that there exists an interest-driven or interest-incentive to do the hearer infringe the independency and publish a colored study in order to help the economic bonding and run into the demands of clients. This survey reveals the possible ground for hearer go againsting the independency. Then Solomon et Al. ( 1988 ) conclude that the proviso of NAS strengthens the economic bond between the hearer and auditee therefore the independency will be threatened.
Stockley ( 1981 ) put frontward that the hearers who provide the NAS to their clients seem to be less independency than those do non supply. He proceeds to look into the Big Eight spouses ( local houses, loan officers and fiscal analysis ) in order to derive their perceptual experiences of hearer independency related to supplying NAS. The results can be found that these spouses believe that the auditor-provided NAS will harm the hearer independency. Along side this, a research based on the context of Malaysia conducted by Hai Yap and Gul ( 1984 ) , they examine the state of affairs of NAS proviso in Malaysia through puting a hypothesis that the proviso of NAS adversely impact on hearer independency. Consequently, Hai Yap and Gul ( 1984 ) test the hypothesis and verify the consequence that the hearers provide the NAS and the hazard of hearer independency at the same time.
However, the job country in the work of Hay Yap and Gul is the range of survey. They simply focus on the underdeveloped state. In Malaysia, the auditing industry do non developed as the same velocity as those developed states, therefore the scope of research maybe narrow which implies that they should besides concern more about the developed states.
Conversely, at the same clip ( 1984 ) , Reckers and Pany continually seek the state of affairs in the US ( the developed state ) . Although the state is different, the consequence is the same. They observed the US company board of managers in a sample of 92 by directing the questionnaires. At last, they found that there are 69 % people who believed that the hearer independency will be damaged when supplying the NAS.
Many professionals hold the sentiment that against supplying the NAS. More interestingly, they examine the proviso NAS will impair the hearer independency in bureau cost and portion monetary value angels other than look intoing the relationship between the proviso NAS and the hearer independency straight. For illustration, Parkash and Venable ( 1993 ) explain that the companies have higher bureau cost will halter the hearer independency in visual aspect because those companies purchase comparatively lower sum of NAS. To be more exactly, they use the cause-effect method to look into whether the proviso the NAS will conflict the hearer independency. First, they observed the high bureau cost of these companies so as to happen the possible economic bond between the companies and incumbent hearers. Second, they found out the bing economic bond due to buy the NAS. Finally, they verified that proviso NAS will endanger the visual aspect of hearer independency which consistent with the point of view of Frecka et Al. ( 1988 ) that the NAS purchased by the company as an inducement will bring on the hearer to bear the audit hazard and lead to consist the hearer independency and the aim of the audit. Hence, they analyzed this issue through analyzing the bureau cost dimension.
In portion monetary value angle, Firth ( 1997 ) adopts the method of look intoing the portion monetary value of the company to exemplify how the hearer independency will be damaged by NAS proviso. Firth ( 1997 ) concludes that the reduced portion monetary value of the company make the company entree to the capital market hard when the hearer is perceived to be deficiency of independency. The writer researches the hearer damage caused by the NAS proviso by analyzing the portion monetary value and capital market. Then, Kasznik ( 1999 ) uses Firth ‘s ( 1997 ) survey as a footing for the statement that the portion monetary value in the fiscal study may reflects the degree of buying the NAS. Actually, if the investors know the degree of NAS proviso, they would judge the grade both the economic independency and the damage of independency. This may explicate why the hearer ‘s independency can be hampered. Equally, the undermentioned figure ( Figure 5 ) will explicate the thought of the Firth.
On the contrary, Fernley ( 2002 ) indicates that there is no relationship between the portion monetary values and NAS proviso. Additionally, Antle and Gordon ( 2006 ) make up for the lacks in the articles of Firth ( 1997 ) and Fernley ( 2002 ) and they propose a comparatively impersonal point of position. They find that the hearer independency will be diminished by the economic bond generated merely by those abnormally moneymaking NAS other than all of the NAS proviso. Thereby, the anterior researches ‘ spread can be filled by Antle and Gordon ‘s work.
3.1.1.2 Future economic involvement and hearer independency
Harmonizing to Antle ( 1984 ) , the hearer independency will be impaired due to the hearer obtain the future economic involvement or income by chiefly supplying the NAS to the clients. Similarly, UK audit houses have been using the statutory audit services as ‘loss leader ‘ because the profitable NAS proviso is more deserving procuring for them ( Mitchell et al. , 1993 ) . Most of times, the hearers will trade-off between the future income and the cost of go againsting independency and audit failures cost ( DeAngelo, 1981 ; Simunic, 1984 ; Chuang and Kallapur, 2003 ) so hearers would reluctant to give up the chances of deriving high NAS fees ( Matsumura et al. , 1997 ) . It is can be seen that the future economic involvement for hearers chiefly come from the payment of NAS proviso, which may endanger hearer independency because the hearers fear of losing the NAS income ( DeAngelo, 1981 ; Antle, 1984 ; Simunic, 1984 ; Magee and Tseng, 1990 ; Matsumura et al. , 1997 ) .
Most of audit houses now choose to supply the repeating NAS due to high NAS gross ( future economic involvement ) , which could take to independence-impairing ( Parkash and Venalbe, 1993 ) . In other words, the hearers enjoy the economic bond with the clients because their hereafter involvements rely on the clients. However, the sum of the repeating NAS proviso will be determined by the higher or lower bureau cost3 and assorted placeholders ( Firth, 1997 ) . Furthermore, the hearer independency damage ‘s degree is different. When the hearer provide more recurring-NAS for those companies with lower bureau cost, the independency is difficult to keep than those companies with higher bureau cost purchase fewer recurring-NAS ( Firth, 1997 ) .
Presents, the hearers become brainsick for deriving the NASF. Hence, the Australian audit commission began to revise the proportion of NASF and do the NAS do non transcend 15 % ( NASF/Total gross & lt ; 15 % ) ( Sharma and Sidhu, 2001 ) . Equally, the Toronto Audit Committee Office set the regulations for modulating the gross of NAS ( proviso ( Mitchell et al. , 2001 ) . The ground for commanding the NAS proviso found by Sharma and Sidhu ( 2001 ) is that the big sum of future income ( NAS gross ) via media independency therefore influences the hearer ‘s judgement easy. In one word, the future involvement affects the hearer ‘s judgement, which makes the hearers issue the colored clean study for those hard-pressed companies ( Firth, 2002 ) and going-concern study for bankruptcy companies ( Sharma and Sidhu, 2001 ) . In Sharma and Sidhu ‘s ( 2002 ) survey, they investigate the information of Australian insolvent companies between 1989 and 1996. After detecting the sample of 49 belly-up companies, they found that the degree of NAS payment ( future involvement ) positively relates the possibility of publishing the colored going-concern sentiment and negatively relates the hearer independency. Nevertheless, the job of this survey is the little sample size. Therefore, the external cogency of these consequences is questioned.
3.1.1.3 Provision of NAS and AS jointly and auditor independency
The audit houses view uniting the audit services and NAS to the same clients as a valuable opportunity to turn ( Hillison and Kennelley, 1988, p.33 ) , which is helpful to derive a bulk of market portion for endeavoring in the ferocious competition among audit houses ( Johnson and Lys, 1990 ) . In contrast to the above statement, Canning and Gwilliam ( 1999 ) opine that the hearer independency comprised when they provide the audit and non-audit services to the same client. They investigate whether proviso the audit services and NAS will impact on the perceptual experience of hearer independency in the commercial environment of Irish by utilizing both mail questionnaires and semi-structured interviews. The 67 % of respondents steadfastly oppose supplying audit and NAS together due to the auditor-impairing. However, the restriction of this survey may be the little and closed Irish audit market, which will act upon the interviewees ‘ replies ( Caning and Gwilliam, 1999 ) . In consistent with Canning and Gwilliam ( 1999 ) , Fearnley ( 2002 ) conclude that joint proviso will damage the hearer independency both in visual aspect and fact.
Consistent with the above writers, some research workers study the joint proviso and hearer independency through analysing the pricing schemes. Joint commissariats associate with the ‘lowballing ‘ pricing, which means that the hearers decrease the audit fees in the whole audit procedure intentionally in order to gain the high NAS fees ( DeAngelo, 1981 and Zimerman, 1986 ) . The clients have an inducement to pay higher NASF for ‘shopping sentiment ‘ ( Magee and Tseng, 1990 ) . Therefore, a batch of the bookmans ( DeAngelo, 1981a ; Palmorose, 1986 ; Simon and Francis, 1988 ; Schartzberg, 1990 ) opine that the lowbaling will impair the hearer independency because the hearers will derive a rent from audit and NAS proviso and the rent merely likes the audit fees unpaid by the client.
3.2 Observation Two: The statements in Favour of NAS proviso
A batch researches point out that proviso NAS will beef up the hearer independency and convey benefits for the hearers and the clients ( Simunic, 1984 ; Simon, 1985 ; Ferguson et al. , 2000 ; Frankel et al. , 2002 ) . In the followers, the grounds for why the NAS proviso will non impair the hearer independency can be divided into two dimensions ( due to the infinite is limited ) .
3.2.1 Knowledge Spillovers
The NAS proviso enhances the hearer ‘s cognition of the client ( Shockley, 1982 ) . In add-on, about the “ cognition spillover ” , some research workers have the different sentiments, they believe that hearers ‘ cognition will be enhanced when they provide NAS, ensuing in increased objectiveness ( knowledge spillover ) and independency ( Goldman and Barlev, 1974 ; Wallman, 1996 ) . Specifically, the hearers will be familiar with the information of the clients and the procedure of the auditing ( from hearer to auditee ) , which will bring forth the cognition spillovers ( Barkess and Simnett, 1994, p.101 ) from supplying the audit and NAS jointly ( Simunic, 1984 ; Simon, 1985 ; Turpen, 1990 ) . Systematically, Simunic ( 1984 ) states that cognition transportation occurs when the same hearers provide audit and NAS. They proceed to happen that hearers can derive cognition and roll up their experience. The ground for it is that hearers utilize the cognition of non audit work to use in audit work when they audited both audit and NAS. Furthermore, Arrunada ( 1999 ) concludes that the double map complements of the NAS better audit map and add the value of the audit ‘s steadfast repute.
More significantly, the clients will acquire the benefit from the cognition spillover because they do non necessitate to happen their ain advisers for making consultancy work that will salvage cost for them ( Simunic, 1984 and Beck et al. , 1988 ) . Additionally, the clients who purchase both audit and NAS from the same audit house usually would be charged less than those clients buy the audit and NAS from different audit houses, which mean that clients could bask the benefits from the cognition spillover and cost-saving consequence ( Palmrose, 1986 ) . Similarly, Antle et Al. ( 2006 ) look into the audit and NAS fees informations from UK between 1994 and 2000 and happen the cognition spillover ( economic graduated tables ) generated from NAS proviso to scrutinizing. Then, they province that the NAS proviso besides do non act upon the hearer independency. From a cost point of position, supplying NAS will cut down overall cost increases the proficient quality of scrutinizing, enhance competition, which finally increase the hearer independency non sabotage it ( Arrunada, 1999 ; Goldman and Barlev, 1974 ; Wallman, 1996 ) .
However, Davis et Al. ( 1993 ) behavior a survey for disputing the theory of Simunic ( 1984 ) that there exists an consequence of cost economy for clients. Davis et Al. ( 1993 ) assume that cognition spillover may originate the cost economy and the client become profitable, which will impair the hearer independency. At last, this assume is rejected because there is an grounds demoing that joint proviso non merely do non do the cost economy but do non damage the hearer independency every bit good.
3.2.2 Production Efficiencies
The Council of the ICAEW ( 1987, p.5 ) province that commissariats the NAS will assist the hearers to transport out their audit work efficaciously due to the cognition spillover and believe that a prohibition on proviso NAS may be ‘counter-productive ‘ . Furthermore, the hearers have an overall apprehension with the state of affairs of the clients and offer some utile suggestions for them, hence the client are willing to retain their hearers because they will derive the production efficiencies ‘ benefit ( Beck et al. , 1988 and Beattie et al. , 1996 ) . Dopuch and King ( 1991, p.61 ) conclude that the hearers provide the NAS to their clients may bring forth the efficiencies of the production in most of times.
3.2.3 Audit Quality
In a distinguishable position, proviso NAS do non needfully damage the hearer independency but reinforce the audit quality ( Arrunada, 2008 ) . Furthermore, utilizing tierce of the UK listed companies as sample, Lennox ( 1999 ) examines the relationship between the NAS proviso and the audit quality when the NASF are disclosed, which has a consequence that audit quality do non reduced by NAS proviso.
Specifically, Firth ( 2002 ) consisted with Lennox ( 1999 ) argues that the NAS proviso will better the efficiency of the hard-pressed companies ‘ job find which in bend enhance the whole audit procedure and audit quality. Two old ages subsequently, Kinney et Al. carry on a survey to analyze whether the NAS proviso would impair the audit quality through analysing 500 companies in the US during 1995-2000. After detecting this issue on these companies, Kinney et Al. ( 2004 ) opine that there is a chance that NAS proviso may beef up the audit quality due to the hearer obtains more available information or the cognition spillover benefit. Therefore, some surveies ( Krishnan, 2003, Balsam et al. , 2003 ) besides test the influence of the NAS proviso on the audit quality by mensurating the placeholders ( ERC and discretional accumulations ) and conclude that the NAS proviso is improbable to go against the audit quality despite of the increased NASF ( Lim and Tan, 2006 ) .
4. Fees War: The Case of Economic Dependence
4.1. Fee dependance and Auditor independency
Most of the times, fee dependance associates with the audit and NAS fees payment ( Mautz and Sharaf, 1961 ) . Confronting this issue, the 3rd parties frequently question that whether the hearer will keep the hearer independency when they received the audit and NAS fees from their heavy purchasers ( Mautz and Sharaf, 1961 ; Firth, 1981 ; DeAngelo, 1981a ) . Most of the foreigners answer that the big sum of fees paid by the managers of the concern may convey the hazard of the independence-imparing because the hearers reluctant to lose the fees ( Mautz and Sharaf, 1961 ) and in bend difficult to keep independency ( Firth, 1980 ) .
In order to happen out the possible ground why the fee dependance arises, DeAngelo ( 1981a ) gives the reply that there is an inducement for hearers to gain fees due to the DeAngelo ‘s economic theoretical account, which in bend the independency will be threatened. Along side with the DeAngelo ( 1981a ) , Wines ( 1994 ) states that the hearers will seek their bests to maintain the clients due to the close economic dependance on the auditee. Therefore, the complete hearer independency does non be when there fee dependance existed ( Francis, 2006 ) . Base on the above analysis, the relationship between hearer independency and fee independency can be summarized in the Figure 7.
4.2. Compare the inclination of Audit and NAS fees in typical states
China Situation
In China, the audit commission do non necessitate the companies disclosure the fees of audit and NAS in the one-year study, which is the grey country for scrutinizing. Therefore, it is hard to happen the overall inclination of the fees. In the undermentioned, take the bank and nomadic industry for analysing the inclination.
Bank Industry
For look into the fees inclination in this industry, taking the pillar company as the sample may happen the inclination easy.
The undermentioned Figure 8 shows the inclination of the bank.
Beginning: ( Lin and Chan, 2000 ) .
It is clear to see that the audit fees were increased from 2006 to 2007. By contrast, the non audit fees were decreased, which implies that the alteration of the fees follow the international inclination after the Enron bankruptcy.
Telecommunication Industry ( The tabular array is the audit and NAS fees of China Mobile )
This Figure 9 shows a downward inclination on the audit and NAS fees. By contrast, the audit and NAS fees in China have a comparatively lower degree than other developed states.
For China, the commission of the auditing should command the audit and NAS fees ‘ degree and better the fees ‘ transparence.
Australia Situation
Audited account fees ratios ( Figure 10 ) are shown in the followers.
Beginning: ( Li, 2006 ) .
The reduced audit fee ratio between 1982 and1995 occurred when hearers adding costs through increasing the rising prices and wages, which lead to the ratio of audit fees go down. On the contrary, the NASF additions which reveal that the audit and NAS fees relate with the state of affairs of the economic.
Canada Situation
The NAS fees part in Canada are shown in the Figure 11.
Beginning: ( Samer, et al. , 2008 ) .
The NAS fees ratio decreased from 2003 to 2007 in a high velocity, which possibly a response of the accounting dirts in the universe broad.
United States
For the local accounting houses in United States, their beginnings of income are explained in the Figure 12.
Beginning: ( Chen, et al. , 2008 ) .
Prior to the Enron fiasco, the income of the NAS of the New York ‘s local audit houses goes up during 1998-2000 while the NAS gross has a decreased tendency after the Enron prostration because some profitable NAS will non allowed to offer to the clients ( APB, 2004 ) .
4.3. The Case of Economic Dependence
The economic dependance can be found both in developed states and in developing states every bit good and look into the fees payment becomes the hot issue in the auditing industry.
DeBerg et Al. ( 1991 ) imply that economic dependance relates with the proviso of NAS. In consistent with DeBerg et Al. ( 1991 ) , Ezzamel et al. , ( 1996 ) look into the relationship between audit service and NAS by utilizing a sample of 314 UK listed companies during 1992-1993. The consequence shows that the NASF make up huge sum ( 87 % ) of entire fees that pose a menace on the auditor-independence. However, the job of the survey is the short observing period so the consequence could be capable to the short-period prejudice which may be deficiency of persuasive in a sense.
After this, the survey conducted by Craswell ( 2002 ) measures the relationship between the fee dependance and hearer independency by utilizing the revelation fees informations from 1989 amalgamations in Australia, which could non happen any grounds that the fee dependance in the national degree or the local market degree impairs the hearer independency. Comparing with anterior researches ( DeBerg et al. , 1991 ; Ezzamel et al. , 1996 ) , Craswell ( 2002 ) has an opposite decision that is fee dependance ( economic dependance ) do non menace the independency because the audit houses adopt the system ( the reappraisal of spouse and equal ) so as to protect the personal auditor-independence.
Two old ages subsequently, Hay et Al. take the top 200 houses in New Zealand during 1996-1998 in order to analyze the influence of economic dependance on the aim of the hearers by comparing the velocity of audit and NAS fees ‘ growing. The consequences imply that the NAS fees ‘ growing ( 42.95 % ) is quicker than the audit fee ( 6.96 % ) , which means that the audit houses ‘ incomes chiefly depend on the NAS payments ( NAS fees dependance ) and fee dependance have the negative influence on the hearer independency ( Hay, et al. , 2004 ) .
Similarly, the accounting houses ‘ fees part in 2006 besides consisted with the decision of Hay et Al. ( 2004 ) . The undermentioned Figure 13 shows the information of the fees.
From the above tabular array, it is can be seen that the fees created from NAS are higher than those from audit services, which indicates that the NASF take up the huge bulk of the entire gross of the auditing houses and the audit houses rely on the NASF.
Furthermore, economic dependance requires bettering the transparence of the fees revelation. In early survey, Firth ( 1980 ) argues that the gross of the audit house ‘s gross will be controlled between 10 % and 15 % . Furthermore, Glezen and Millar ( 1985 ) province that ASR no. 250 in the USA requires the listed companies to unwrap the sum of the NAS purchased from the auditing houses. In recent survey, Peasnell et Al. ( 2007 ) suggest that the UK should unwrap the NAS wholly, dividing the audit and NAS and prohibition certain those NAS that impair the independency. However, in the USA, the SOX add the revenue enhancement services to forbid and the Danish becomes more utmost because it bans all of the NAS ( Canning and Gwilliam, 1999 ) .
5. Decision
The hearer plays an of import function in the auditing industry. The hearers should stand for the complete independency when they carried on the audit work. Specifically, the hearers provide an indifferent study for investors and stockholders, which will better the audit quality. In fact, the hearers ever are tempted by the high NASF so publish the more favorable sentiment even for the hard-pressed companies. Therefore, the hearer could non economically independent of their client. Although proviso of the NAS will impair the hearer independency, there besides has some positive effects such as cognition spillover, audit quality betterment and production efficiency. Obviously, forbid all types of the NAS may be inappropriate for maintain the independency. The suggestion of Peasnell et Al. ( 2007 ) is that it is non necessary to censor all of the NAS and they province that unwraping the NASF will heighten the hearer independency. These suggestions are meaningful and can be referenced by the audit commission in the further.
Mentions
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Appendix 1: Context of Auditing
In Latin significance, the word “ audire ” represented listener or hearer. ( Hayes, et al. , 1999, page 2 ) . Then they argued that the audit activities besides are found in ancient China, Greek and Rome. In fact, China experiences a long history of audit development. The shadow of audit can be found out in different dynasties ( see Appendix 2 ) . It shows the development of audit in assorted periods in ancient China. In the universe broad, audit went through two phases — -ancient auditing and modern auditing.
The day of the month back to antediluvian Egyptian and Roman and Greek civilizations, the antediluvian audit was implemented merely when the owner suspected a fraud had occurred. Independent hearers were appointed to hear verbal accounts from people who responsible for pull offing the accounting records. Compared with the antediluvian auditing, the modern auditing is more complex and the hearers will look into the histories for possible fraud by a client, which is far more than hard currency confirmation. For modern audit, observing the possible fraud and mistakes are simply an incidental purpose, its chief nonsubjective being to give a “ true and just position ” on the audit study for the concern activities and study on the fiscal place of these activities.
Additionally, the international and professional organic structures of scrutinizing give new life to scrutinize so as to understand audit in a clear manner. For audit, its basic definition is “ an official scrutiny of the histories ( or accounting systems ) of an entity by an hearer ” . ( ACCA paper F8 UK, 2007, page 12 ) .
The Auditing Practices Board ( APB ) besides defines an audit as:
“ An audit of fiscal statements is an exercising whose aim is to enable hearers to show an sentiment whether the fiscal statements give a true and just position ( or equivalent ) of the entity ‘s personal businesss at the period terminal and of its net income of loss ( or income and outgo ) for the period so ended and have been decently prepared in conformity with the applicable coverage model ( for illustration relevant statute law and applicable accounting criterions ) or, where statutory of other specific demands prescribe the term ‘present reasonably ‘ . ” ( Millichamp, 1996, page 6 ) .
Apart from the professional definition for audit, in a concern point of position, it besides defined audit as “ a systematic scrutiny of the activities and position of an entity, based chiefly on probe and analysis of its systems, controls, and records. ” ( Millichamp,1996 ) .
In add-on, Auditing & A ; Assurance Standard ‘Basic Principles Regulating an Audit ‘ issued by the Institute of Chartered Accountants in Ireland ( ICAI ) points out “ An audit is the independent scrutiny of fiscal information of any entity, whether net income oriented or non and irrespective of its size or legal signifier, when such an scrutiny is conducted with a position to showing an sentiment thereon. ” ( Kumar and Sharma, 2005 ) .
Similarly, the American Accounting Associations Committee ( AAAC ) in 1973 provinces that audit is “ a systematic procedure of objectively garnering and measuring grounds associating to averments about economic actions and events in which the person or organisation doing the averments has been engaged, to determine the grade of correspondence between those averments and established standards, and pass oning the consequences to users of the studies in which the averments are made. ” ( Poter, et Al, 2003 ) .
Harmonizing to the account of audit in dictionary, it says that audit is a procedure used to prove whether the bing criterions of attention are being satisfied, which illustrates the audit in item. The procedure of audit as follows:
( hypertext transfer protocol: //medical-dictionary.thefreedictionary.com/audit 12/11/2008 ) .
This graph reflects the map of audit in side. This rhythm may command the activities of companies efficaciously and makes them to supply their true fiscal statements.
The aim of an audit defined by the first International Standard on Auditing ( ISA ) 200 Objective and general rules regulating an audit of fiscal statements:
‘aˆ¦to enable the hearer to show an sentiment whether the fiscal statements are prepared in all stuff respects, in conformity with an applicable fiscal coverage model. ‘ ( ACCA paper F8 UK, 2007, page 12 ) .
Of class, the hearer must supply an audit study which included the true and just sentiment for non merely big but besides little and average sized company ‘s fiscal statements. Normally, Hayes, et Al. ( 1999 ) argued that the hearer has certain tolerable mistakes in the audit procedure, which means the hearer have a opportunity to do errors because they may non guarantee their sentiments are accurate. This regulation may be sensible for hearers.
