Non-audit Services and Auditor Independence Depending on Client Performance

Abstract

We posit that the effect of non-audit fees on auditor independence in Korea is based on audit client performance. Further, we suggest that an audit client with low performance has an incentive to purchase non-audit services (NAS) from an incumbent auditor to facilitate earnings management and steer accounting practices in a preferred direction. We find evidence that as non-audit fees in Korea increase, auditor independence is reduced only for low-performing audit clients. Thus, unconditional prohibition of NAS seems unnecessary. Regulators and policymakers should examine the motivation for purchasing NAS, particularly among audit clients with poor performance.