Non-audit services and audit quality: evidence from Germany

The study examines the impact of non-audit services (NAS) on audit quality. It is motivated by the new re-strictions on the joint provision of audit and NAS for EU Member State (Federal Ministry for Economic Affairs and Energy 2016, Regulation 2014, EC 2011) which are based on concerns that auditors’ provided NAS may impair auditor independence. Empirical evidence in Germany as well as in other Continental European countries is limited. We use a sample of 2567 firm-year observations from German listed firms between 2006 and 2013 and test the association between the level and type of non-audit service fees (NAS fees) paid to the auditor and audit quality. Earnings management is used as a proxy for audit quality. The findings indicate that the higher levels of NAS fees negatively affect audit quality. Separating different types of NAS shows that especially other assurance and other consultancy services have a negative impact on audit quality, whereas the level of tax services has no impact on audit quality. In further tests we show that cap on NAS fees at 70% of averaged three prior years audit fees imposed by the EU fails to prevent an impairment of audit quality, but that a moderate level of NAS does not result in lower audit quality compared to audit quality of auditors providing no NAS.