Some Empirical Evidence from Publicly Quoted UK Companies on the Relationship Between the Pricing of Audit and Non-audit Services

Using data obtained from a sample of 314 UK quoted companies (excluding financial sector companies), this paper examines three aspects of the relationship between fees for audit and non-audit services: (a) the extent and nature of the provision of non-audit services to audit clients; (b) whether the positive association between the level of audit fees and non-audit services fees found in the majority of non-UK studies holds in the UK; and (c) whether it is possible to throw further light on the nature of the relationship between audit fees and non-audit services fees by exploring the interaction between non-audit services and other factors that appear to affect audit pricing. Our results suggest that: (i) income earned by audit firms from non-audit work for quoted clients averaged nearly 90% of the levels of audit fee earnings in 1992/93 (and more than a quarter of clients paid more for non-audit services than for the audit); (ii) the extent of voluntary disclosure of the breakdown of non-audit services was limited and the existing disclosure requirement allowed considerable variety in the manner in which non-audit services fees incurred or paid abroad were disclosed; (iii) there was a significant positive association between fees for audit and non-audit services similar to that reported in the majority of US and Australian studies; and (iv) four of the nine interaction terms introduced were significant, implying that non-audit services fees may moderate the association between other explanatory variables and audit fees.