TUGAS II

PEMERIKSAAN AKUNTANSI I
Kesimpulan Jurnal The Effects of the Provision of
Consulting Services on Audit Reporting Quality

Disusun oleh:
CECILIA DEBORA SALIM
18101155110005
AKUNTANSI-1

JURUSAN AKUNTANSI
FAKULTAS EKONOMI & BISNIS
UNIVERSITAS PUTRA INDONESIA “YPTK”PADANG
2020/2021
Kesimpulan:

Dari jurnal yang dilampirkan, dapat disimpulkan bahwa CPA

(Certified Accountant Public) menyediakan jasa audit dan jasa non-audit
atau Non-Audit Service (NAS). Contoh dari NAS ini adalah jasa pajak, jasa
konsultasi, dan jasa layanan konsultasi keuangan. Sebagian besar pendapatan
CPA berasal dari Non-Audit Fees (NAFs) dan sebagian besar NAFs
dihasilkan oleh klien audit.

Namun di beberapa negara, CPA dilarang melakukan jasa audit dan

NAS secara bersamaan. Hal ini dikarenakan adanya kemungkinan CPA yang
menerima NAS akan mendapatkan biaya relatif tinggi dari perusahaan yang
bersangkutan. Sehingga akan membuat auditor kehilangan independesi dan
objektivitasnya. Auditor yang menyediakan NAS bersamaan dengan jasa
audit memungkinkan laporan keuangan perusahaan yang diaudit tidak sesuai
dengan persyaratan.

Di sisi lain jika CPA tidak menyediakan jasa non-audit, maka

pendapatan CPA akan berkurang serta membatasi kemampuan CPA untuk
mempekerjakan dan mempertahankan individu yang berkualifikasi tinggi.
Untuk mengatasi hal tersebut, Undang-Undang Akuntansi Spanyol tahun
2002 mewajibkan perusahaan yang diaudit untuk memasukkan dalam
laporan tahunan mereka “catatan ke akun” pengungkapan terpisah dari biaya
audit dan NAF yang dibayarkan kepada CPA dan perusahaan terkait.
The Service Industries Journal
Vol. 32, No. 3, February 2012, 411 – 429

The effects of the provision of consulting services on audit

reporting quality
Michael Willoughbya∗, Pedro Carmonab and Alexandre Momparlerc
aIDEASInstitute, Polytechnic University Valencia, Camino de Vera s/n, Valencia, Spain;
bDepartmentof Accounting, Facultat d’Economia, Universitat de Valencia, Av. Tarongers s/n,
Valencia 46022, Spain; cDepartment of Corporate Finance, Facultat d’Economia, Universitat de
Valéncia, Av. Tarongers s/n, 46022 València, Spain
(Received 15 November 2010; final version received 3 February 2011)

The growing complexity of the global business environment is leading innovative firms
to demand further external counselling to better handle rapid change and increasing
uncertainty. Likewise, the implementation of new information systems is usually
carried out with the help of external advisors. This paper examines whether the
provision of consulting services undermines audit reporting quality by testing for an
association between advisory services and audit reporting. A cross-sectional logistic
regression is estimated to test the relationship between consulting fees and the audit
outcome. The evidence suggests that there is no statistically significant association
between non-audit fees and audit outcome. This finding is consistent with the idea
that audit reporting quality is not impaired by the provision of consulting services.

Keywords: consulting; auditing; audit reporting quality; auditor independence;

disclosure of fees

Introduction
An auditor’s primary role in the society is to provide opinions for reliable and relevant
information. Many company failures have fostered the ongoing debate on auditors’
potential conflicts of interest. The potential conflicts of interest that may derive from the
structural features of the auditor– client relationship are the cause of a lack of independence
on the part of auditors. Auditor independence is crucial for the credibility of published
financial information and hence important for trust in the functioning of capital markets,
not only for investors but also for other stakeholders such as creditors and employees.
Over recent decades, researchers have examined issues concerning the provision of
non-audit services (NAS). Most Certified Public Accountant (CPA) firms typically
provide NAS such as tax, consulting and financial advisory services. For many CPA
firms, a large proportion of their revenue comes from NAS (Ezzamel, Gwilliam, &
Holland, 1996; Hopwood, Page, & Turley, 1990; Turner, Aldhizer, & Shank, 1999)
and, to a great extent, NAS fees are produced by audit clients (Wines, 1994). The main
objective of this paper is to examine whether providing NAS undermines the auditor’s
independence by testing for an association between the provision of NAS and auditor
reporting opinions using data from Spain.
Public accountants may derive a number of potential benefits from the provision of
NAS to audit clients. Some claim that NAS enhances auditor knowledge of the client,

∗Corresponding author. Email: mwilloughby@ideas.upv.es

ISSN 0264-2069 print/ISSN 1743-9507 online #

2012 Taylor & Francis
http://dx.doi.org/10.1080/02642069.2011.567415
http://www.tandfonline.com
412 M. Willoughby et al.

leading to a more efficient and effective audit (Beck, Frecka, & Solomon, 1988; Simunic,
1984). Ryan et al. (2001) argue that restricting NAS can inhibit the auditor’s acquisition of
task-specific knowledge capital, thereby reducing auditor competence and lowering audit
quality. Albrecht and Sack (2000) claim that limiting NAS will have an impact on the
ability of CPA firms to hire and retain highly qualified individuals. However, even assum-
ing these benefits, the value of NAS by auditors depends upon the cost/benefit trade-off,
with compromises in auditor independence as one of the most critical potential costs.
For example, NAS creates an economic bond between auditor and client, which some
claim can cause the auditor to lose objectivity (Ashbaugh, 2004). This matter has
merited increased attention as the NAS fees to audit fees ratio has been on the rise in
recent years (Earnscliffe Research and Communications, 1999).
As we later go on to discuss in greater detail in this article, a large number of empirical
studies have investigated the influence of NAS on the independence of the auditor.
However, most of these studies were performed in the Anglo-American business
environment. Cultural, professional and economic differences between Anglo-American
and Continental European countries provide the stimulus for our empirical investigation
of the impact of NAS on auditor independence. Few studies have been conducted in the
latter group of countries, which includes Spain. Thus, motivation for this paper comes
from the fact that there is little empirical research on auditor independence in Spain and
because the aforementioned differences may actually lead to interesting results.
Furthermore, it is clear that the appropriateness of auditor-provided NAS continues to
be controversial and regarded with distrust by regulators. Consequently, it is imperative
that ongoing research facilitates well-informed policymaking with respect to the costs
and benefits of restricting the scope of NAS to audit clients.
Over time, regulators have taken action in response to concerns over the auditor’s pro-
vision of NAS. A primary function of auditor independence regulation is to ensure that any
financial incentives auditors may have to approve misleading or inaccurate accounting are
outweighed by market and regulatory deterrents to compromising auditor independence.
The 2002 Spanish Accounting Act1 (Ley 44/2002) requires CPA firms to report the
hours and fees billed to each client to the Accounting and Auditing Institute (ICAC), 2
including separate disclosure of audit and NAS. Likewise, the 2002 Act requires
audited companies to include in their annual reports’ ‘notes to the accounts’ the separate
disclosure of audit and non-audit fees (NAFs) paid to CPA and associated firms (DeBerg,
Kaplan, & Pany, 1991).
Independence rules included in Spanish law regulate the activities of state-authorized
and registered auditors. Auditing standards identify different issues that can compromise
statutory auditors’ objectivity and independence: self-interest threat, self-review threat,
advocacy threat, familiarity (or trust) threat and intimidation threat. These circumstances
are based on a European Commission Recommendation on auditor independence in the
European Union (European Commission, 2002). The starting point for this Recommen-
dation is that an auditor should not carry out a statutory audit if there is a financial interest,
business, employment or other relationship, including the provision of NAS, with the audit
client entity that might threaten the audit firm’s independence.
With regard to the provision of NAS in Spain, statutory auditors should neither make
any decisions nor take part in any decision-making on behalf of the audit client. Spanish
auditing laws highlight specific situations which can impair auditor’s independence, such
as preparation of accounting records and financial statements, design and implementation
of financial information technology systems, valuation services, participation in the audit
client’s internal audit or acting for the client in the resolution of litigation and recruiting
 The Service Industries Journal 413

senior management. All these different situations are implicit in the contents of the
European Union Recommendation. Thus, an audit engagement should be rejected
whenever the auditor may appear to not act independently.
The Directive 2006/43/EC of the European Union (EU) includes the basic principle of
the Commission Recommendation. It adopts the principle-based approach to auditor inde-
pendence included in the Recommendation, that is, it requires the auditor to consider the
independence threats and risks for each audit engagement, as well as the safeguards for
mitigating those risks. Thus, the legal framework identifies a series of threats to indepen-
dence and the corresponding safeguards which can be put in place to reduce the indepen-
dence risk to an acceptable level. Auditors should constantly apply safeguards against
threats to auditor independence in order to be seen as independent. The ultimate safeguard
is neither to enter into certain relationships nor to provide certain services additional to
the statutory audit. The Directive also addresses specific circumstances in the application
of the principle-based approach for the most frequently occurring situations and
relationships where auditor independence may be compromised.
In short, this Directive clarifies statutory auditor duties, independence and ethics by
introducing a requirement for external quality assurance and by ensuring robust public
supervision of the auditing profession. It represents an important attempt to ensure that
investors and other stakeholders can rely fully on the accuracy of audited accounts and
to enhance the EU’s protection against the sort of scandals that took place in European
companies such as Parmalat and Ahold.
According to Firth (2002), concern that the joint provision of audit and NAS may
affect the independence of auditors has led some countries to prohibit such practices.
For example, Japan (Nakase, 1985), France (Schilder, 1994), Belgium (Moizer, 1997)
and Italy (CAJIC, 1996; and Kinney, 1999) prohibit the auditor supplying NAS to audit
clients and some EU countries severely restrict or discourage the joint provision of
audit and consulting services (Moizer, 1997; Needles, 1985; and Schilder, 1996). On
the contrary, the United Kingdom and many other British Commonwealth nations
impose few restrictions, and the joint provision of audit services and NAS is very
common in these countries. The joint provision of audit and NAS is also common in
the United States, although the SEC3 has seriously questioned whether auditor indepen-
dence can be upheld when the auditor provides NAS to a client.
The present research contributes to the literature by exploring whether the provision of
NAS in a continental European country can endanger or compromise auditor indepen-
dence. Most previous literature has discussed the compatibility of the provision of audit
and NAS to the audit client in Anglo-American countries. Furthermore, this is one of
the first studies carried out in Spain concerning the possible effects of NAS on auditor
independence. There is little research performed in Continental EU countries addressing
auditor independence issues. Likewise, the fact that since 2002 auditing firms disclose
both audit and NAS billed to clients has made it possible for us to carry out this research.
In this way, we can discover whether the provision of services, other than audit services,
has an impact on auditor independence in Spain. Thus, an empirical investigation of the
impact of NAS on auditor independence in Spain is promising. Fundamentally, the
question we address is whether auditors receiving high levels of NAFs are more or less
likely to qualify the audit opinion.
The methodology we use to carry out our research includes both the performance of
univariant tests (non-parametric analysis) and multivariate tests (logistic regression).
More specifically, we perform a cross-sectional logistic regression model for a 3-year
period where audit opinion is the dependent variable and NAFs is an independent
414 M. Willoughby et al.

experimental variable. Other independent control variables affecting the audit report qua-
lification are also included in the model.
Based on a sample of companies floated on the Spanish stock exchange, the findings of
our research indicate that the weak, positive association existing between NAFs and
audit opinion is not statistically significant. Consequently, there is no evidence that
auditor independence is undermined by the provision of NAS to audit clients.
The remainder of the paper is organised as follows. The literature review contains a
discussion of prior research into the association of NAS to auditor independence, an exam-
ination of the nature of auditor independence and an assessment of the likely impact of
NAS on auditor opinions. Next, in the research design section, the variables, the model
specification and the data characteristics are discussed. The empirical results are
then explained and a sensitive analysis is performed. Finally, a summary and the main
conclusions of our study are put forward.

Literature review
Inherent in the term society is the concept of ethics and without the integrity it brings, the
shadow of self-interest and opportunism loom large (Loras & Vizca´ıno, 2010; Mintz,
1995). As the English writer and poet Samuel Johnson once said, ‘Integrity without
knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful’.
This could be no truer than in the case of auditing firms, whose professionalism and ability to
take into account the interests of all stakeholders involved should be unquestionable
(Moschandreas, 1997). Auditors need to be the independent judges as to the legitimacy
of the information provided by managers, although the commitment to integrity and
reputation often becomes a difficult task in the face of a variety of stakeholder interests.
Mintz (1997) identifies three approaches to ethically professional auditing, although
they are not mutually exclusive and are, to a certain extent, complementary. These are
the justice-based approach, the idea that any action on the part of auditors should result
in the best possible outcome for all concerned; the rights-based approach, which concerns
the duty to respect the rights of all stakeholders even if this is not necessarily in the best
interest of their clients; and the utilitarian approach, which places emphasis on the value
given to an action in light of its consequences. What is clear is that auditors have to bear
the weight of good practice on their shoulders and be seen to be ethically professional.
The provision of NAS and its potential threat to auditor independence has been exam-
ined from two major perspectives. The early literature took a behavioural approach. This
literature principally surveyed auditor and third party perceptions of the effects of NAS on
auditor independence. The results of this literature indicate diverging perceptions with
auditors generally perceiving little or no conflict, while third parties perceive threats to
audit independence (Gul, 1991; Hartley & Ross, 1972; Knapp, 1985; Pany & Reckers,
1983, 1984; Schulte, 1965; Shockley, 1981; Titard, 1971). However, the results of this
literature are not compelling because of potential internal validity threats (Gul &
Windsor, 1994; Pany & Reckers, 1988; Schulte, 1965).
The later literature adopted archival methods that permitted a more objective approach
to examining whether auditors report more favourably for companies that acquire NAS.
Kornish and Levine (2004) use a common agency model to analytically investigate
whether NAS affects auditor opinions. The authors demonstrate that, in a single-period
setting, managerial discretion over NAS fees can cause auditors to issue unqualified
opinions on reports that do not warrant them. This result, however, is clarified in a multi-
period setting, leaving no incentive to provide unduly favourable opinions. Wines
 The Service Industries Journal 415

(1994) studies audit reports for companies traded on the Australian Stock Exchange from
1980 to 1989 and finds that companies receiving unqualified reports spend more on NAS
than companies receiving at least one audit qualification. Barkess and Simnett (1994)
collect data for the majority of the top 500 companies listed on the Australian Stock
Exchange from 1986 to 1990, and find no significant relationship between NAS fees
and audit qualifications. Craswell (1999) reports similar results, again using a sample of
Australian companies.
A report by Lennox (1999) studies the association between NAS fees and the auditor’s
opinion in the United Kingdom and finds a positive weakly significant relationship
between NAS fees and audit qualifications – companies having higher NAS fees are
more likely to receive a qualified opinion.
From a different perspective, some research has focused on companies under financial
distress. Sharma and Sidhu (2001) estimate a logit model, based on a sample of 49 bankrupt
public Australian companies, to assess the auditor’s propensity to issue a going-concern
opinion. They find that the likelihood of a going-concern opinion decreases as the ratio of
NAS to audit fees increases, suggesting that the auditor’s independence may be impaired
by NAS. Sharma (2001) reports a similar result. DeFond, Raghunandan and Subramanyam
(2002), however, perform a more comprehensive analysis, using a US sample of 1158 finan-
cially distressed companies filing with the SEC. They fail to find a significant relation
between the auditor’s propensity to issue a going-concern opinion and the ratio of NAS
fees to audit fees. Geiger and Rama (2003) report a similar result using a sample of 132
financially distressed US manufacturing companies.
Other papers that have inspired our research include those by De Fuentes and Pucheta-
Martinez (2009); Monterrey and Sanchez-Segura (2007); Amara, Landry and Doloreux
(2009); Baggio and Cooper (2010); Brown and Duguid (1998); Cegarra-Navarro,
Cordoba-Pachon and Fernandez de Bobadilla (2009); Chen (2009); Coleman (1998);
Davenport and Prusak (1998); Fan and Ku (2010); Jensen, Poulfelt and Kraus (2010);
Lee, Liang and Liu (2010); Martinez-Fernandez (2010); McLeod, Vaughan and
Edwards (2010); Pechlaner and Bachinger (2010); Spender (1996); Tolstoy (2010);
Warren, Patton and Bream (2009); and Yang (2009).
In summary, the aforementioned research studies provide little evidence that NAS fees
negatively affect the auditor’s opinion for US firms. However, the evidence with respect to
Australian and UK firms is mixed. The results of Sharma and Sidhu (2001) and Sharma
(2001) for firms under financial distress are consistent with the two studies on a more
general sample, suggesting that provision of NAS may be related to more favourable
opinions. However, two other studies on a more general sample of firms (DeFond et al.,
2002; Geiger & Rama, 2003) do not support such a relation. Consequently, this is a
research question that remains open and requires work. We hope that studying the question
in a Latin EU country, with a different business environment from that of Anglo-American
countries, may shed some light on the subject matter.

Development of hypotheses
The potential benefits associated with the incumbent auditor providing other services
include a reduction in search costs to the client and increased efficiencies for the
auditor resulting from knowledge spillovers. It has been suggested that these benefits
are outweighed by disadvantages that include the potential impairment to independence.
Simunic (1984) argues that the joint provision of other services and audit services may
result in the auditor being less likely to disagree with management, where disagreement
416 M. Willoughby et al.

may result in dismissal. The cost of losing a client may be greater in cases where the audit
firm has been able to retain some or all of the benefits 4 associated with knowledge spill
overs as economic rents. If these economic rents exist and firms are able to retain them,
the pressures on the auditor to comply with the management may be increased, particularly
when the resources used to earn these rents cannot be transferred to an equally profitable
alternative.
Since a qualified audit report is often an indication of some unresolved differences of
opinion between management and the auditor, the auditor needs to be able to withstand
management pressures in order to maintain independence. These pressures may arise
through fee negotiation, withholding information relevant to the audit or threatening to
put the work out for tender. Where the independent auditor also provides other services,
the economic loss associated with dismissal is potentially greater than if other services
are not provided. Therefore, where other services are provided by the auditor, a potential
threat to independence may occur if the management is able to increase the pressure on the
auditor to issue an unqualified audit report. If auditors are more likely to face dismissal
after qualifying a report (Craswell, 1988) and if the economic losses associated with dis-
missal are potentially higher for incumbent auditors providing other services than those
that solely provide audit services (Hillison & Kennelley, 1988), then it is suggested that
auditors may be less likely to issue qualified audit reports to clients purchasing larger
money values of other services.
Given that measuring auditor independence as such is extremely difficult, we use the
audit report opinion as a proxy for auditor independence, in accordance with previous
studies (Craswell, 1999; Li, Hay, & Knechel, 2003; Sharma & Sidhu, 2001; Wines,
1994). Thus, as the level of NAS provided by the auditor increases: (i) the auditor may
become reluctant to qualify the audit report because of the possibility of losing the high
levels of lucrative NAS; and (ii) the auditor may wish to avoid issuing a qualification relat-
ing to work provided by members of his or her own firm. Therefore, the following prop-
osition can be formulated:
Incumbent auditors providing higher levels of NAS to their clients will be less likely to issue
qualified audit reports than auditors providing lower levels of NAS to clients.

Research design
Variables
The model we use to test whether there is any relationship between NAFs and the audit
opinion is a cross-sectional logistic regression model.

Dependent variable
Audit opinion (OPINION) is the dependent variable of the model. It is a categorical
variable, 1 ¼
qualified audit report (including adverse opinion and disclaimer report).
This information was collected from published financial statements. The consideration
of this proxy for audit independence is consistent with Craswell (1999), Sharma and
Sidhu (2001) and Li et al. (2003).
The aforementioned Spanish Accounting Regulations require companies to disclose
details of audit fees and other fees paid to the group auditor separately in notes to the
accounts. Thus, in Spain, fees paid to auditors are reported in companies’ annual reports.
 The Service Industries Journal 417

Independent experimental variable

The amount of Euros paid to auditors for NAFs or other services is the experimental
variable. This continuous variable was transformed to the ratio of NAFs to total fees
paid to auditors (NAFTF) to ensure a better fit to the regression model. This technique
is consistent with similar transformations (Craswell, 1999; Firth, 2002; Li et al., 2003).

Independent control variables

In order to examine the NAF effects associated with a company’s qualified opinion, it was
considered necessary to control other variables that have been identified in previous
research as affecting audit report qualification (e.g. Bell & Tabor, 1991; Craswell,
1999; Firth, 2002; Krishnan, 1994; Li et al., 2003; McKeown, Mutchler, & Hopwood,
1991; Monroe & The, 1993; Sharma & Sidhu, 2001). These were:
(1) Total assets (TA), as a measure of the size of the company. The absolute euro
value (E000) of total assets was transformed by the natural log (LTA) to ensure
a better fit to the regression. The use of the log is consistent with Firth (1997).
(2) Asset composition, expressed as current assets divided by total assets (CATA).
The ratio of current assets to total assets measures the relative investment in
current assets. Firth (1997) and Craswell (1999) have used this variable to
control the effect that may be associated with the importance of current assets.
(3) Debt composition, which is defined as long-term debts divided by total assets
(LTDTA). Clients with a high ratio of long-term debts to total assets may have
more volatile earnings and this can lead to litigation against auditors. It is a
measure of leverage risk used in previous research by Craswell (1999), Firth
(2002) and Li et al. (2003). In addition, Hamada (1972) observed that debt
ratios are useful measures of companies’ financial risk.
(4) Ratio of earnings before interest and taxes to total assets (EBITTA). This ratio is
a measure of performance.
(5) Net profit (LOSS). This is a dummy variable coded one (1) if net profit is less than
zero in the current year, otherwise LOSS is coded zero (0).
EBITTA and LOSS can also be viewed as proxies of profitability. Shareholders
and debtholders of clients who have poor profitability are more likely to sue the
auditor, and they may hope to defend themselves by qualifying the statements
(Firth, 2002).
(6) Audit Firm (BIG4) is a dummy variable taking the value one (1) if the auditor is
one of the Big Four firms, otherwise BIG4 is set equal to zero (0). This dummy
variable has been used as a measure for auditors. This is consistent with
Barkess and Simnett (1994), Craswell (1999), Firth (2002), Krishnan, 1994 and
Li et al. (2003).
(7) Prior year qualification (PRQ) is a dummy variable coded one (1) if the company
obtained a qualified opinion the previous year, otherwise PRQ is coded zero (0).
Craswell (1999) points out the importance of prior qualification as a significant
predictor of qualified opinions.
Therefore, OPINION is modelled as a function of the amount paid to auditors for
NAFs or other services (NAFTF), the size of the company (LTA), asset composition
(CATA), financial risk or leverage (LTDTA), company profitability (EBBITA and
LOSS), Big Four status of the auditor (BIG4) and audit report qualification in previous
year (PRQ). Variables are included in the model to control cross-sectional differences
418 M. Willoughby et al.

in factors that are assumed to be associated with the underlying problems that give rise to a
qualified audit report.

Model specification
We test the hypothesis to examine the relationship between NAFs and the audit opinion
estimating the following cross-sectional logistic regression model for the years 2005,
2006 and 2007:

OPINION = a + b1NAFTF + b2LTA + b3CATA + b4LTDTA + b5EBITTA + b6LOSS

+ b7BIG4 + b8PRQ,

where
OPINION, a categorical variable taking the value one (1) if the audit report is qualified
and zero (0) if the audit report is clean; NAFTF, NAFs divided by total fees; LTA, natural
log of total assets (E000); CATA, current assets divided by total assets; LTDTA, long-
term debt divided by total assets; EBITTA, ratio of earnings before interest and taxes to
total assets; LOSS, a dummy variable, coded one (1) if net profit is less than zero, other-
wise it is coded zero (0); BIG4, the auditor indicator variable (dummy variable), taking the
value one (1) if the auditor is one of the Big Four firms, otherwise it is equal to zero (0);
PRQ, a dummy variable coded one (1) if the audit report from the previous year is
qualified, otherwise it takes the value zero (0).
The independent or predictor variables in logistic regression can take any form. That
is, logistic regression makes no assumption about the distribution of the independent vari-
ables. They do not have to be normally distributed, linearly related or of equal variance
within each group. The relationship between the predictor and response variables is not
a linear function in logistic regression. The use of logit is consistent with the prior litera-
ture (e.g. Bell & Tabor, 1991; Craswell, 1999; Krishnan, 1994; Li et al., 2003; McKeown
et al., 1991; Monroe & The, 1993). The model used in this study contains mainly account-
ing based variables and, as noted above, the variables are assumed to be associated with
the underlying problems that give rise to qualified opinions.
Impairment of auditor independence may be more likely if the client NAF represents a
large proportion of the auditing firm’s total fee income (audit and NAF). High consultancy
fees derived from client companies may deter auditors from qualifying the financial state-
ments of those clients. In order to control for this factor, the experimental variable NAFTF
is included in the regression model. Because a large NAF may jeopardize independence,
a negative coefficient is hypothesized for NAFTF. The model tests whether the receipt of a
qualified audit opinion are negatively related to the ratio of NAFs to total audit fees
(a negative coefficient of b1) after controlling for other potential explanatory factors.

Dataset
The fees and accounting data were hand-collected from the annual financial reports of
listed companies in Spain for the years 2005, 2006 and 2007, which are available at the
official registration files of CNMV.5 Spanish companies have to report fee data since
2002. The CNMV Registration Files contain information on all Spanish-listed companies.
All companies except those belonging to the financial industry were selected; they are
excluded from consideration as the structure of their operations and their financial
 The Service Industries Journal 419

statements are very different from other companies; banking companies are typically
excluded in other audit studies. In deciding which years to analyse, we considered the
most recent years with annual accounts lodged at the time the test was carried out. Exclud-
ing firms whose annual reports were not available or with incomplete information, finally
the data consisted of 183 companies in 2005, 171 in 2006 and 158 in 2007. This selection
covers a large proportion of Spanish businesses. The number of observations (512 in total),
and the fact that the information used was taken from published financial reports that have
been externally verified should help increase the reliability of the results.

Results
Descriptive statistics and non-parametric results
A summary of descriptive statistics of the variables used in the subsequent regression
analysis of audit report opinion are presented in Table 1. It shows means, medians, stan-
dard deviations and non-parametric results based on Mann– Whitney and Wilcoxon tests.6
According to the results, companies with qualified opinions have, on average, more
accounting losses (net profit less than zero, LOSS), more prior year qualification (PRQ)
and a greater negative ratio of company profitability (EBITTA). Also, 31% of the compa-
nies with qualified opinions were operating at a loss; and PRQ was present in 53% of the
companies that obtained this type of report. On the other hand, there were no significant
differences (Sig ¼0.05) for the rest of the control variables (TA, CATA, LTDTA and
B4) and the experimental variable (NAFTF) as shown in Table 1; although qualified com-
panies tend to be smaller than unqualified companies (size measured by total assets) and
also tend to have a lower ratio of long-term debts to total assets. The ratio of NAFs to total
fees we obtained for Spain (21%) is consistent with the ratio obtained by Firth (1997) for
Norway (25%).

Binary logistic regression results

This section presents multivariate regression results of the determinants of audit OPINION
(qualified or pure) in Spain. The relationship between the likelihood of receiving a quali-
fied opinion and the amount of NAFs was investigated by binary logistic regression, with
the dependent variable being the likelihood of receiving a qualified opinion. Correlations
among the variables could possibly confound interpretation of the regression (by biasing
coefficients, statistical significances, and even directional signs) and so the severity of the
problem must be analysed. The correlation matrix for the independent variables is shown
in Table 2, which indicates that multicollinearity is not a major impediment to interpreting
the regression results of the logic model specified. In general, the correlations are quite
low. The highest correlation, as an absolute value, is 0.79 between CATA and LTDTA
and the second highest is 0.43 between LTA and BIG4. Judge, Hill, Griffiths, Lutkepohl,
and Lee (1988) and Gujarati (1995) state that correlations below absolute 0.80 should not
be too harmful as regards multicollinearity. Furthermore, Hosmer and Lemeshow (1989)
argue that all theoretically relevant variables should be included in a logistic regression
model unless their collinearity is extreme. Variance inflation factors and condition
indices also imply that multicollinearity is not a major problem. Therefore, standard
interpretation of the regression coefficients can be made (Belsley, Kuh, & Welsch, 1980).
The results of the logistic regression testing the relation between NAFs and audit opinion
are shown in Table 3. The level of correct classification of the model is 88.7%, which
is quite high (see further details in Table 4). Pseudo R2 values are not reported as
 420
Table 1. Summary descriptive statistics of data.
Mean Median† Standard deviation†
Asymptotic sigma
Variable∗ All Unqualified Qualified Unqualified Qualified Unqualified Qualified Z-statistic‡ (two-tailed)

M. Willoughby et al.
NAFs/NAFTF 0.205 0.202 0.226 0.066 0.000 0.263 0.298 20.032 0.975
TA (E000s) 1924323.84 2067217.14 1022054.74 316026.00 198873.50 7073228.97 2087260.96 21.664 0.096
CATA 0.595 0.629 0.384 0.333 0.325 5.248 0.270 20.343 0.731
LTDTA 1.146 1.287 0.254 0.146 0.170 22.731 0.272 21.140 0.254
EBITTA 20.003 20.002 20.012 0.019 0.010 0.809 0.151 22.454 0.014
LOSS 0.150 0.120 0.310 24.269 0.000
B4 0.780 0.790 0.700 21.625 0.104
PRQ 0.120 0.060 0.530 211.106 0.000
∗
Sample size (n): Unqualified, 442 and Qualified, 70.
†
Medians and standard deviations omitted for dichotomous valued variables.
‡
From Mann– Whitney and Wilcoxon tests.
 The Service Industries Journal 421

Table 2. Correlation matrix of independent variables.

CATA LTDTA EBITTA LOSS BIG4 NAFTF PRQ

LTA 0.180 20.213 20.139 0.088 20.434 20.189 20.041
CATA 20.792 20.006 0.030 0.022 0.030 0.037
LTDTA 0.395 0.111 20.011 20.054 0.018
EBITTA 0.351 0.028 20.070 0.125
LOSS 0.088 20.045 0.164
BIG4 20.288 20.077
NAFTF 0.096
Notes: LTA, log total assests; CATA, ratio of current assets, total assets; LTDTA, ratio of long-term debts, total
assets; EBITTA, ratio of earnings before interest and taxes, total assets; LOSS, dummy variable coded one (1) if
net profit is less than zero, otherwise LOSS is coded zero (0); BIG4, dummy variable coded one (1) if the auditor
is one of the Big For firms, otherwise BiG4 is coded zero (0); PRQ, dummy variable coded one (1) if audit report
in previous year is qualified, otherwise PRQ is coded zero (0); NAFTF, Ratio of non-audit fees, total fees.

Table 3. Logistic regression results of audit opinion.

Variable Beta SE of beta Wald p-value Exp(B)
NAFTF 1.064 0.618 2.966 0.085 2.897
LTA 20.064 0.097 0.437 0.508 0.938
CATA 20.039 0.536 0.005 0.942 0.961
LTDTA 20.035 0.138 0.064 0.800 0.965
EBITTA 21.094 1.527 0.513 0.474 0.335
LOSS 1.051 0.388 7.325 0.007 2.861
BIG4 20.467 0.425 1.205 0.272 0.627
PRQ 2.909 0.333 76.407 0.000 18.339
Constant 21.802 1.143 2.484 0.115 0.165
Notes: LTA, log total assests; CATA, ratio of current assets, total assets; LTDTA, ratio of long-term debts, total
assets; EBITTA, ratio of earnings before interest and taxes, total assets; LOSS, dummy variable coded one (1) if
net profit is less than zero, otherwise LOSS is coded zero (0); BIG 4, dummy variable coded one (1) if the auditor
is one of the Big For firms, otherwise BiG4 is coded zero (0); PRQ, dummy variable coded one (1) if audit report
in previous year is qualified, otherwise PRQ is coded zero (0); NAFTF, ratio of non-audit fees, total fees.
Sample size 512, Model x2 8.648, p ¼ 0.373, likelihood ratio 304.205, correct classification 88.7.

Table 4. Classification table. Experimental variable: NAFTF.

Predicted
Audit opinion
Percentage correct
Observed Unqualified Qualified
Audit opinion
Unqualified 428 14 96.8
Qualified 44 26 37.1
Overall percentage 88.7
Notes: A constant is included in the model. The cut value is 0.500.

their use of measures of goodness-of-fit for logistic regression analysis is the subject of
debate (Craswell, 1999). Also, Veall and Zimmermann (1994) suggest that the R2
values tend to be substantially lower than the standard linear regression procedure esti-
mates. The Wald statistic (which is equivalent to the t-value) and its significant level
422 M. Willoughby et al.

indicate that LOSS and PRQ are significant. As might be expected, the coefficient for the
client LOSS and PRQ variables has a positive sign; thus the presence of accounting losses
or PRQ increases the likelihood of the client receiving a qualified audit report. In the same
way, the NAFTF coefficient indicates that, as the proportion of NAFs to total fees
increases, so does the likelihood of qualification, although it is not significant. The remain-
ing coefficients are not statistically significant. For example, the company profitability
ratio (EBITTA) has a negative sign which is in line with the expectations; however, the
coefficient is not statistically significant. The Big Four auditor variable is not significant
either.
An important interpretation of the coefficients in a logistic regression relates to the
change in the log-odds of the dependent variable given one unit change in the independent
variable (Sharma & Sidhu, 2001). The exponent of the coefficient represents the ratio-
change in the odds of the event of interest for a one-unit change in the predictor (indepen-
dent variables). This exponent produces the estimated multiplicative change that occurs in
the odds of the dependent variable and 100× [Exp(B) 2 1] yields the percentage change
in the odds of the dependent variable given one unit change in the coefficient (Demaris,
1992). Based on the data in Table 3, each additional percentage in NAFTF increases
the likelihood of a qualification report by a factor of 2.897 or 189.7%, while all other
variables are equal.
In short, according to the logistic regression results, although the experimental variable
is not significant at a level of 5%,7 the coefficient of the variable is positive. In other words,
an unqualified audit report is less likely to be issued to clients with higher NAFs to total fee
ratios than to clients generating lower proportions of NAFs to total fees. Therefore, audi-
tors may not compromise their independence in situations where the provision of NAS
generates economic rents, in the context examined here. This observation is consistent
with Barkess and Simnett (1994), Craswell (1999) and Li et al. (2003), but inconsistent
with Firth (2002), Sharma and Sidhu (2001) and Wines (1994). The observed inconsisten-
cies could be attributed to the context studied, in our case the Spanish one.

Sensitivity analysis
Four statistical sensitivity issues of concern are considered, including non-normality of the
data, the model specification, effect of outliers and sample specification.

Sensitivity to non-normality
As mentioned above, some of the data may not be normally distributed thus influencing the
results of the regression model. However, non-normal distribution does not present signifi-
cant threats to logistic regression because it does not require that the data be normally
distributed (Hosmer & Lemeshow, 1989; Ohlson, 1980). Prior research shows that logit
is robust to violations of the normality assumption (e.g. Lo, 1986; McFadden, 1984).
This is perhaps the most significant advantage of logistic regression over other multi-
variate techniques such as linear regression and multiple discriminant analysis.

Sensitivity to model specification

There is considerable diversity in the specification of models of audit opinions both in
terms of the control variables and the proxies used. To test the sensitivity of the results
to model specification (potential model misspecification), two alternative models
 The Service Industries Journal 423

Table 5. Logistic regression results. Sensitivity to model specification. Experimental variable:

NAFTA.

Variable Beta SE of beta Wald p-value Exp(B)

NAFTA 0.184 0.206 0.796 0.372 1.202
LTA 20.015 0.097 0.023 0.880 0.985
CATA 20.046 0.534 0.007 0.931 0.955
LTDTA 20.058 0.143 0.165 0.685 0.943
EBITTA 21.088 1.540 0.499 0.480 0.337
LOSS 1.068 0.386 7.676 0.006 2.911
BIG4 20.366 0.419 0.762 0.383 0.694
PRQ 2.886 0.329 76.741 0.000 17.913
Constant 22.291 1.147 3.987 0.046 0.101
Notes: NAFTA, ratio of non-audit fees, total assets multiplied by 1.000. Rest of the variables are defined in
Table 3.
Sample size 512, Model x2 4.759, p ¼ 0.783, likelihood ratio 306.409, correct classification 89.3

were estimated. First, the experimental variable was recalculated using the ratio of
NAFs to total assets (NAFTA). The use of this ratio is consistent with Firth (2002)
and Sharma and Sidhu (2001); and neither in this case (Table 5) nor in the regression
model developed with NAFTF, was the experimental variable significant at levels
of 5%.
Secondly, because of the importance of PRQ as an independent variable to predict
qualified opinions (p-value ¼0.00), the model was re-estimated excluding this variable.
Once again, the independent experimental variable was not significant at a conventional
level of 5% (Table 6). Therefore, the result of non-significant association between the
provision of NAS and the auditor qualification decision is robust to various model
specifications.

Sensitivity to outliers
The descriptive statistics in Table 1, particularly for the TA variable, may suggest the
presence of outliers. A scatterplot of the data revealed four outliers for TA. The results
of re-performing the logistic regression following the removal of these outliers are
shown in Table 7. Once again, the experimental variable (NAFTF) was not significant
at a level of 5%.

Table 6. Logistic regression results. Sensitivity to model specification. Without PRQ.

Variable Beta SE of beta Wald p-value Exp(B)

NAFTF 0.929 0.536 3.001 0.083 2.533
LTA 20.061 0.084 0.527 0.468 0.941
CATA 20.168 0.461 0.132 0.716 0.846
LTDTA 20.059 0.121 0.234 0.629 0.943
EBITTA 22.564 1.376 3.473 0.062 0.077
LOSS 0.879 0.333 6.981 0.008 2.409
BIG4 20.321 0.371 0.750 0.387 0.725
Constant 21.102 0.983 1.258 0.262 0.332
Notes: NAFTF, ratio of non-audit fees, total fees. Rests of variables are defined in Table 3.
Sample size 512, Model x2 4.878, p ¼ 0.770, likelihood ratio 385.443, correct classification 86.7
424 M. Willoughby et al.

Table 7. Logistic regression results. Sensitivity to outliers.

Variable Beta SE of beta Wald p-value Exp(B)

NAFTF 1.073 0.617 3.026 0.082 2.923
LTA 20.055 0.098 0.310 0.577 0.947
CATA 20.046 0.536 0.007 0.931 0.955
LTDTA 20.035 0.138 0.064 0.800 0.966
EBITTA 21.141 1.532 0.555 0.456 0.319
LOSS 1.045 0.388 7.248 0.007 2.843
BIG4 20.484 0.426 1.289 0.256 0.616
PRQ 2.898 0.333 75.861 0.000 18.147
Constant 21.892 1.157 2.675 0.102 0.151
Notes: Sample size 508, Model x2 7.853, p ¼ 0.448, likelihood ratio 303.746, correct classification 88.6.

Sensitivity to sample specification

As a sample sensitivity test, the logistic regression model was estimated for a sample
that included only companies which reported fees paid to auditors for NAS. As shown
in Table 8, the test variable NAFTF was once again not significant, suggesting that the
sample composition of the present study is not an important problem and does not jeopar-
dize the implications of the findings. Therefore, the previous results on the experimental
variable are robust to the sample specification analysed.

Summary and conclusions

There is concern among the accounting profession about whether the provision of NAS
by auditing firms to their audit clients will impair the independence of the auditor.
There is evidence to suggest that these services are becoming more important in the
total revenue structure of audit firms. In Spain, the recently legislated requirements
for companies to disclose payments for NAS provided by their auditors, make data
available with which to investigate these independence questions related to the joint
provision of audit and consultancy services. Although it is very difficult to investigate
this issue as it is not possible to directly observe auditor independence, an auditor
whose independence has been impaired may be more inclined to give a non-neutral
opinion. In fact, we have considered audit report opinion as a proxy for auditor
independence.

Table 8. Logistic regression results. Sensitivity to sample specification.

Variable Beta SE of beta Wald p-value Exp(B)

NAFTF 0.000 0.001 0.526 0.468 1.000
LTA 20.201 0.134 2.242 0.134 0.818
CATA 20.147 0.800 0.034 0.854 0.863
LTDTA 20.014 0.220 0.004 0.949 0.986
EBITTA 21.095 2.738 0.160 0.689 0.335
LOSS 1.085 0.523 4.311 0.038 2.960
BIG4 1.288 1.128 1.303 0.254 3.626
PRQ 2.583 0.460 31.504 0.000 13.243
Constant 21.323 1.967 0.453 0.501 0.266
Notes: Sample size 271, Model x2 7.123, p ¼ 0.523, likelihood ratio 160.264, correct classification 89.3.
 The Service Industries Journal 425

This paper includes an analysis of independence issues associated with the provision of
other services by incumbent auditors, using publicly available data on auditors’ reporting.
The proposition was investigated by estimating a logistic regression model, using data for
Spanish-listed companies for the years 2005, 2006 and 2007. The following variables were
considered: the amount paid to auditors for other services, TAs, asset composition, debt
composition, net income, net profit, audit firm and PRQ.
Based on a sample of 512 observations obtained from the annual financial reports for
the mentioned years, the findings in this paper indicated that there was no significant
association between NAFs and audit opinion. This implies that audit independence
would not be impaired when the client NAF represented a large proportion of the auditing
firm’s total fee income or that the joint provision of audit and NAS would not threaten
auditor independence. Therefore, the result does not provide support for the expectation
that high consultancy fees derived from client companies may deter auditors from qualify-
ing the financial statements of those clients. Other empirical studies also reported that
there is not a significant association between NAFs paid to the auditor and auditor inde-
pendence (Barkess & Simnett, 1994; Craswell, 1999; Li et al., 2003). The findings add
to our knowledge of auditor independence as they illustrate the situation in an EU Latin
country.
The results are robust to different sensitivity analysis, such as model or sample speci-
fication. In all cases, the estimated regression models led to similar conclusions: the test
variable of NAFs was not significant.
In short, the importance of these findings is that they suggest that NAS may not be a
major threat to auditor independence. And they represent an effort to measure whether the
provision of NAS is associated with clean audit reports. As Firth (2002) points out, regu-
lators, auditors and the accounting profession can use the findings in their deliberations
and arguments regarding the ongoing open debate about the restriction or prohibition of
NAS provided to audit clients. Thus, this paper makes an important contribution to our
understanding of the impact of NAS on auditing independence in a Continental European
country and raises the question of whether the application of more restrictive rules would
be adequate in Spain.

Acknowledgements
The authors are grateful to the University of Valencia, Spain for the financial support from
Research Project UV-AE-24161 and to the Ministry of Science and Technology of Spain
for the financial support from Research Project ECO2009-14457-C04-04.

Notes
1. This Act was passed in response to a number of financial scandals that caused great concern in the
international business environment (Enron, Woldcom, Parmalat.. .) and it attempted to recover
economic agents’ trust on financial markets. The act also included specific measures such as
the requirement for audit team heads to take turns; the setting up of an auditing committee for
listed firms; and the extension of the auditors’ incompatibilities based on potential conflicts of
interest.
2. ICAC: acronym for Instituto de Contabilidad y Auditor´ıa de Cuentas.
3. United States Securities and Exchange Commission.
4. It is argued that these benefits occur because of the lower costs associated with the joint provision
of services (Abdel-khalik, 1990; Palmrose, 1986; Simunic, 1984).
5. CNMV: Comisión Nacional del Mercado de Valores. In english, National Securities Exchange
Commission.
426 M. Willoughby et al.

6. Most variables analysed did not accomplish the assumptions required for parametric tests such as
normality.
7. Indeed, the experimental variable is significant at 10% level (p-value ¼ 0.085).

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