Congratulations to Andy Imdieke, Assistant Professor of Accountancy for his winning research, The Distraction Effect of Non-audit Services on Audit Quality (Journal of Accounting and Economics).
In recent years, audit firms have seen substantial growth of their non-audit services (NAS) revenue for non-audit clients. This has led to regulatory concerns that an emphasis on non-audit services (NAS) could distract from the audit function. Motivated by regulator concerns that recent rapid NAS growth could impair audit quality, this study examines whether a greater emphasis on providing NAS to audit clients generally (i.e., not to a specific client) can distract from the audit function. This study finds evidence of an NAS distraction effect, where a greater emphasis on NAS at the audit office-level results in more client financial statement restatements. Further, the association exists among clients that purchase minimal NAS, suggesting that this association relates to distraction effects in addition to independence issues examined in prior research. Specifically, the study finds that a reduction in audit quality starts to occur when an audit office receives approximately one-quarter of its total fees from NAS. This study should be of interest to audit firms, audit committees, and regulators because it provides new evidence regarding issues related to a business model that includes both audit and non-audit services.