The provision of non-audit services and earnings conservatism: Do New Zealand auditors compromise their independence?
Purpose – This study seeks to examine the relation between non-audit services provided by incumbent auditors and an important aspect of earnings quality – conservatism, using New Zealand data. Conservatism is defined as the adoption of accounting policies that accelerate expenses towards the current period and/or defer revenues to later periods. If the provision of non-audit services undermines auditor independence and encourages the condoning of clients' aggressive accounting practices, this will be revealed by a reduction in accounting conservatism. Design/methodology/approach – The method aims to determine whether Basu's conservatism is affected by the level and proportion of non-audit services, where the dataset is partitioned into multiple levels of these services. Findings – Using 528 firm-year observations, evidence is presented for the existence of earnings conservatism in New Zealand. However, no evidence of a negative association between non-audit services and earnings conservatism is found. Research limitations/implications – Although widely accepted in the conservatism literature, the Basu model still suffers from some drawbacks. Issues of endogeneity may also contribute to the insignificant results. Practical implications – The results are consistent with factors such as reputational penalties and litigation risk constraining auditor behaviour. Auditors in New Zealand may therefore still maintain their independence “in fact”, irrespective of the level of non-audit fees (NAFs) purchased by clients. Originality/value – This paper contains the first tests of conservatism using New Zealand data. It adds to the body of knowledge about the relationship, or the lack thereof, between NAF and desirable attributes of accounting.
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