Are Non‐Audit Services Economically Beneficial to Audit Clients?

Abstract

We study the association between non‐audit services (NAS) and the potential economic benefit to audit clients of higher investment efficiency. Little prior research has examined whether NAS produces measurable benefits or simply additional costs for clients procuring them. We contribute to this sparse literature by examining whether the level of NAS is associated with firm‐wide investment efficiency. Our findings indicate that increased NAS fees are generally negatively associated with investment efficiency, with this association being stronger for smaller audit clients and primarily driven by the audit‐related component of NAS. However, we also find that the negative NAS association with investment efficiency is significantly reduced when the NAS is obtained from high‐quality auditors. These findings suggest that not all NAS is alike and that different benefits can accrue when clients obtain NAS from high‐quality auditors. Therefore, when assessing NAS in other contexts, as well as the economic benefits of NAS, it is important to determine whether the NAS is obtained from high‐quality or non‐high‐quality auditors. Our findings should be of interest to audit clients and their audit committees as they make decisions about purchasing NAS, as well as to audit practitioners and regulators, given that the provision of NAS remains controversial, and the economic benefit to clients appears nuanced.