Disclosure of non-audit services in annual reports and auditor independence: Evidence from Italy

This article explores recent regulatory reforms in Italy and analyzes the first-time application of mandatory disclosure in annual reports of audit and non-audit fees. This information can convey to readers of financial statements an indication of auditor independence (in appearance). An empirical analysis is conducted on annual reports of 239 Italian listed companies for the year 2007. The main research objectives are as follows: (1) to provide a comprehensive description of the relative level of non-audit fees; and (2) to investigate the relation between non-audit services (NAS) and the opinion expressed in the audit report. The evidence shows that the average ratio of non-audit fees (further assurance services, tax advisory services and other services) to total auditor remuneration is 0.24. In particular, there are 38 companies (15.9 per cent) that paid their auditor more for NAS than for audit services; excluding further assurance services, there are 22 cases (9.2 per cent) with a ratio of non-audit fees that is higher than 0.50. In our sample, we observed 231 unqualified opinions (96.7 per cent) and eight qualified opinions (3.3 per cent): a statistical significant relationship between the NAS ratio and qualified opinions was not found. However, the study's results show that there is a positive association between the emphasis of matter paragraph in the audit report and NAS. This finding cannot be interpreted as an indication of compromised auditor independence, thus opening space for further empirical studies on the use of emphasis of matter paragraphs in auditor reports. © 2011 Macmillan Publishers Ltd.