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 Staff Paper 3/2006

Audit, Non-Audit Services and Auditor

Independence

Zulkarnain Muhamad Sori

Coordinator
Centre of Excellence for Applied Financial and Accounting Studies
Faculty of Economics and Management
University Putra Malaysia,
43400 UPM Serdang,
Selangor
Malaysia.

Dr. Yusuf Karbhari

Director
Asian Accounting, Finance and Business Research Unit
Cardiff Business School, Cardiff University
Aberconway Building, Colum Drive
Cardiff, CF10 3EU
Wales, United Kingdom
 Audit, Non-Audit Services and Auditor Independence

Dr. Zulkarnain Muhamad Sori and Dr. Yusuf Karbhari

ABSTRACT
Regulators and stakeholders in worldwide capital markets have placed a great concern
on the potential threat of joint provision of audit and non-audit services to audit client
on perceived auditor independence. This study reports the research findings of the
effects of the joint provision of audit and non-audit services (NAS) on perceived
auditor independence from the perspective of Malaysian auditors, loan officers and
senior managers of public listed companies. The main findings of the study were that
auditor independence would significantly threaten when audit and NAS were jointly
provided by audit engagement team, however, this perceptions were changed when
exist proper segregation of duties or ‘Chinese Wall’ in audit firms either by way of
staff from separate department or entities.

Keywords: Non-audit services, auditor independence, segregation of duties, Malaysia

and regulations.

1
 Audit, Non-Audit Services and Auditor Independence

1.0 INTRODUCTION
The audit failures that have been reported have led to major criticism of the auditing
profession worldwide by exposing the weaknesses of the profession in terms of
safeguarding shareholders’ and stakeholders’ interests (Brandon et al., 2004; Citron,
2003; Cullinan, 2004; Fearnley and Beattie, 2004; Ghosh and Moon, 2005; Gwilliam,
2003; Higson, 2003; Krishnan, 2005). In this context, auditors should not only be
independent in fact, but more importantly they should be seen to be independent in
examining and attesting clients’ financial statements (Fearnley and Beattie, 2004;
Stevenson, 2002, p. 155)1. Precisely, auditors are expected to be able to independently
decide on reporting strategies without any influence from their clients’ management
(Chandler and Edwards, 1996; Cullinan, 2004).

The force of globalisation in accounting and assurance services has also created ‘the
multidisciplinary nature of large audit firms’ (Brierley and Gwilliam, 2003, p. 435).
These multidisciplinary firms offer audit and non-audit services (NAS) to audit clients
and this has become one of the major concerns regarding the potential auditor
independence dilemma (Craswell, 1999; Quick and Warming-Rasmussen, 2005). A
substantial amount of empirical research has been directed towards identifying the
nature and extent of this threat in developed countries (e.g. Abbott et al. 2001;
Arrunada, 1999; Beattie et al., 1999; Beattie and Fearnley, 2002; Brandon et al.,
2004; Canning and Gwilliam, 1999; Chung and Kallapur, 2003; Ezzamel et al., 2002;
Fearnley and Beattie, 2004; Felix et al., 2005; Frankel et al., 2002; Jenkins and
Krawczyk, 2001; Quick and Warming-Rasmussen, 2005; Raghunandan, 2003) and in
less developed countries (e.g. Gul and Yap, 1984; Teoh and Lim, 1996). The literature
has pointed out that the joint provision of audit and NAS could raise the risk of client
retention due to economic incentives, and the tendency to agree with clients’ choices
of accounting policies (Beck et al., 1988; DeAngelo, 1981; Frankel et al., 2002;
Simunic, 1984).

The provision of non-audit services (NAS) by auditors to their audit clients has been
regarded by regulators in the UK, the US, Australia and various other countries as a
threat to auditor independence (Craswell, 1999, p. 29). A review of the literature by
Beattie and Fearnley (2002) revealed a lack of evidence to support the hypothesis that
joint provision of audit and NAS could threaten auditor independence in fact;
however, it might threaten the appearance of independence. The main question that
arises when auditors provide or could provide both audit and NAS is whether the
auditors are able to conduct their audits impartially, without being concerned about
losing or failing to gain additional services, and the subsequent economic implications
for the audit firm (Lee, 1993, p. 103). In fact, the provision of NAS has the potential
to create economic bonding from the significant amount of fees received from clients
(Simunic, 1984; Beck et al. 1988). The economic bonding between audit firms and
their clients would influence auditor independence. It may be that the level of client
pressure would increase and auditor becomes less concerned with the quality of
internal audits.

1
Fearnley and Beattie (2004) argued that independence in appearance is important because
“independent behaviour (i.e. independence in fact) is unobservable” (p. 121).

2
 The main concern is the ability of auditors to objectively examine their clients’
financial statements while at the same time receiving lucrative NAS fees from the
same client. The joint provision of audit and NAS would create a potential conflict of
interest either consciously or unconsciously, and audit client would feel closely
associated with the auditor and expect them to compromise their independence. Flint
(1988) pointed out, “the auditors may become unduly sympathetic to a directorial or
managerial attitude or interpretation of events, or the work may involve the creation
of systems and information rather than assessing the adequacy of the systems and
information which have been created by the directors or managers” (p. 81).

This paper aimed to examine the effects of the joint provision of audit and non-audit
services on perceived auditor independence held by the Malaysian auditors, loan
officers and senior managers of public listed companies, an environment located in
the South East Asia that received much attention following the ‘Confidence Crisis’ in
late 1990s. However, Malaysian economy is unique due to its fast recovery from the
crisis and showed a strong economic performance that benefited from the ongoing
global upturn, hence, it become among the most favoured foreign investment
locations in this region. A good understanding on auditor independence from this part
of the world is important and perhaps shed some lights on the effect of global
development on this issue to local audit market.

The paper is organised into five sections. The following section offers
literature review on joint provision of audit and non-audit services. Section three
discusses data collection and research method. The fourth sections present the
research findings. The final section provides conclusions of the study, its implications
and suggestions for future research.

2.0 REVIEW OF PREVIOUS RESEARCH

Research into the choice of supplier of NAS has tended to focus on the selection of
service providers, such as from the company’s auditor or elsewhere, and if audit and
NAS are jointly provided by the company’s auditor, whether proper segregation of
duties exists. Research findings on the association of joint provision of audit and NAS
and auditor independence were reported as inconclusive and conflicting (Ashbaugh,
2004; Brandon et al., 2004; Chung and Kallapur, 2003; DeFond et al., 2002; Frankel
et al., 2002; Geiger and Rama, 2003; Kleinman et al., 1998; Reynolds et al., 2004).

The proponents of joint provision of audit and NAS contended that auditor
independence would not be affected because it would improve audit quality (Antle et
al., 1997). Hartley and Ross (1972) found that only 6% of their respondents believed
that the provision of NAS posed a significant threat to independence. Firth (1980)
showed that the provision of NAS was considered to be only a minor threat to auditor
independence. In a study of financial disclosure of NAS, Glezen and Millar (1985)
discovered that stockholders were unconcerned about the joint provision of audit and
NAS adversely influencing auditor independence. Also, it was claimed that the
auditor’s knowledge of the client company would be improved by the provision of
NAS, resulting in increased objectivity (knowledge spillover) and independence
(Goldman and Barlev, 1974; Wallman 1996).

3
 It was argued that the dependence of company management on the audit firm
would be higher in cases where the auditors are providing NAS to their clients, and
that as a result, the client management would have an interest in not losing their
auditor (Goldman and Barlev, 1974). In a study of the profiles of NAS purchased by
US companies, Palmrose (1988) found that the majority of her sampled companies
sourced NAS from their auditors rather than from other suppliers. Also, she found no
significant differences in the use of a company’s auditor to supply NAS, the type of
services performed and the magnitude of NAS purchases. These results indicate that
the respondents were not concerned about the perceived negative impact to auditor
independence. Gul (1989) studied the perceptions of bankers in New Zealand and
found that the effect of provision of NAS was significantly and positively associated
with auditor independence. Moizer (1997) pointed out that the greater the audit firm’s
economic interest, the greater will be client’s dependence. Hussey (1999) reported
that the majority of the UK finance directors that participated in his study suggested
that joint provision of audit and NAS to audit clients should continue to be allowed.

In Malaysia, Gul and Yap (1984) reported that only a small number of the
shareholders and auditors that participated in their study believed that NAS provision
increased their confidence in auditor independence. On the other hand, Teoh and Lim
(1996) found that the provision of NAS was ranked as the second most important
factor that undermines auditor independence.

The joint provision of audit and NAS would create ‘economies of scope’2;
Arrunada (1999, p. 165) pointed out that joint provision of audit and NAS would
reduce overall costs, raises the technical quality of auditing, enhance competition, and
need not prejudice auditor independence or the quality of non-audit services, which
would ultimately increase auditor independence (Goldman and Barlev, 1974;
Wallman 1996). Based on the standard organisation analysis, Arrunada (1999, p. 169)
showed that cost savings gained from the joint provision of audit and NAS will be
transferred to customers as a decrease in price in both markets, and also that the
provision of NAS would ‘result in an increase in client- and firm-specific assets’ (p.
168), where firm-specific assets would ‘always have a positive effect on
independence’ (p. 168). This argument is supported by Grout et al. (1994), who
argued that permitting auditors to perform joint services would reduce auditors’
dependence on a single client and encourage them to diversify as a consequence.

Opponents to the joint provision of audit and NAS claimed that auditors would
not perform their audit services objectively and that joint provision would impair
perceived independence (see, for example, Brandon et al., 2004; Frankel et al., 2002;
Glezen and Miller, 1985; Jenkins and Krawczyk, 2001; Lowe and Pany, 1995; 1996;
Raghunandan, 2003; Wines, 1994) because ultimately they would be auditing their
own work or acting as management (SEC, 2001), and management’s power over the
auditor could be increased due to auditors’ reliance on fees received (Canning and

2
There are two types of economies of scope, namely ‘knowledge spillover’ and ‘contractual economies
of scope’ (Arrunada, 1999, pp. 75-77). Knowledge spillover takes place when two different services
involve elements of the same information set and/or the same professional qualifications. Contractual
economies of scope happen due to the provision of professional services with associated high
transactions costs because of informational asymmetry between client and supplier. Joint provision of
services diminishes the cost of seeking a credible consultant and the cost of warranting contractual
performance.

4
Gwilliam, 1999). Thus, it may influence “their mental attitude, impartiality and
objectivity, and independence of thought and action” (Flint, 1988, p. 82).

2.1 Mode of Provision of Non-Audit Services

The previous section showed mixed results on the issue of joint provision of audit and
NAS. It has been suggested that public accounting firms should have the maximum
discretion to develop and provide audit and NAS to their clients (Mikol and Standish,
1998). However, Mitchell et al. (1993) rejected this idea and believed that the joint
provision of audit and NAS to audit clients would cause unfair competition due to the
use of audit services to sell NAS, and suggested that auditors should be banned from
offering both services to the same client. Similarly, Flint (1988) believed that auditors
would have some form of predisposition towards a favourable assessment because the
firm as a whole was involved in the creation, development or consultation of the
NAS.

As an alternative to a total ban on provision of NAS to audit clients, Arrunada

(1999) recommended the use of different divisions that are responsible for each series
of services as a safeguard to independence. These divisions are organized as profit
centres within audit firms that have their own management and exert little if any
influence over the audit partners’ evaluation or compensation process. In fact, the idea
is justifiable in the UK environment, where Lennox (1999) found a weakly positives
significant association between audit qualifications and disclosed NAS and construed
that the ‘current UK policy may be justified in not banning NAS. This conclusion is
strengthened if policy-makers take account of the economies of scope that may accrue
from allowing the joint provision of audit and NAS’ (p.250). Consistently, Hillison
and Kennelley (1988) believed that the approach would enhance auditor
independence, especially when appropriate safeguards are in place, such as ‘Chinese
walls’ (Mikol and Standish, 1998, p. 546)3.

The potential threat to auditor independence is lessened when there is a

separation of personnel performing NAS and audit services (Pany and Reckers, 1984).
Similarly, Lowe et al. (1999), Lowe and Pany (1995) and Swanger and Chewning
(2001) discovered significant positive associations between auditor independence and
joint provision of NAS by staff separation (segregation of duties). Also, Canning and
Gwilliam (1999) found that only a small percentage of their respondents expressed
concern about the threat to independence when separate departments provide joint
services. However, the option of separate workforces to perform audit and non-audit
3
Section 48 (2) (h) of the UK’s Financial Services Act 1986 illustrates Chinese Walls as “procedures
for restricting flows of information within a firm to ensure that information which is confidential to one
department is not improperly communicated to any other department within the firm. They are widely
used in the financial services sector to manage or avoid conflicts between the duties owed to different
customers, or conflicts between the firm’s interests and the duties owed to customers, which arise out
of the different activities of the component parts of the firm on different sides of the wall”. On the other
hand, the Consultation Paper on Fiduciary Duties and Regulatory Rules the Law Commission (1992)
(Law Com. No. 124) describes Chinese Walls as normally involving some combination of the
following organisational arrangements: (i) the physical separation of the various departments in order
to insulate them from each other; (ii) an educational programme, normally recurring, to emphasis the
importance of not improperly or inadvertently divulging confidential information; (iii) strict and
carefully defined procedures for dealing with a situation where it is felt that the wall should be crossed
and the maintaining of proper records where this occurs; (iv) monitoring by compliance officers of the
effectiveness of the wall; (v) disciplinary sanctions where there has been a breach of the wall (House of
Lords, 1998).

5
services is only possible if the audit firm has enough resources, and smaller firms may
not have such an opportunity for specialisation. However, Quick and Warming-
Rasmussen (2005) found that joint provision of audit and NAS by staff from separate
departments did not improve perceived independence.

Realising the obstacles faced by small firms, Mautz and Sharaf (1961, p. 230)
suggested three alternatives: (i) forbid/prohibit small firms from performing auditing
services on the conjecture that they cannot appropriately perform both and that
auditing is much less likely to be a major source of revenue to small firms; (ii) require
each small firm to select which of the two fields of specialisation it will take on; or
(iii) permit small firms to take on work as they do at present, performing a variety of
services for their clients. Due to lack of incentive for a stringent approach at that time,
Mautz and Sharaf (1961) favoured the third course of action, because small firms
rarely undertake audit duties for companies that have public interest and usually
perform audits for small businesses that have a lack of public interest at the request of
bankers or creditors that have good knowledge about the credibility and reliability of
local accounting practitioners. They further asserted that the drawback of segregation
of duties for small firms is that it will ‘make it more difficult to service their clients
and others with no substantial offsetting benefits resulting from such restriction’ (p.
230).

In Malaysia, Arens et al. (1999) revealed that Big Four firms audited more
than 60% of listed companies and that a large majority of medium and small firms
serve unlisted companies with a lack of public interest. Thus, the kind of separation to
be adopted in the audit market should not be as strict to the extent of their
counterparts in developed markets, where Mautz and Sharaf (1961, p. 230) suggested
that ‘as soon as a given client becomes of sufficient size that there is a substantial
public interest in its audited financial statements, . . . a strict separation of auditing
and other services should be effected, if not by a division within the accounting firm,
then by employment of separate accountants for the two types of services’ (p. 230).

Hillison and Kennelley (1988) had recommended three additional alternatives

to a total prohibition of NAS provision to audit clients: (i) offer NAS to non-audit
clients only; (ii) prohibit certain types of NAS; or (iii) permit all types of NAS with
full disclosure requirements. They alleged that although prohibiting all NAS would
produce the greatest positive impact on perceptions of auditor independence, it would
be the most drastic action. They favoured permitting all types of NAS with full
disclosure because it would create the least resistance from practitioners, avoid
companies’ rejection on disclosure, and it would possibly be effective in monitoring
audit clients’ acquisition of NAS. Although a conflict of interest might arise from the
joint provision of audit and non-audit services to audit clients, it might be
inappropriate to prohibit accounting firms from offering non-audit services if this
issue is observed from the ‘business efficiency’ perspective (Chandler and Edwards,
1996, p.26). Fearnley and Beattie (2004) reviewed prior studies and concluded that
there is no need for total prohibition of joint provision of audit and NAS, as the
dilemma could be overcome by the following suggestion: “more transparency about
how firms manage the conflicts of interest that NAS provision creates; whether audit
partners are rewarded for earning NAS; and the nature of the NAS being provided” (p.
124). Additionally, audit committees should play their role in approving the provision
of NAS. Indeed, the Securities and Exchange Commission (SEC) in the US and Bursa

6
Malaysian Berhad (BMB) in Malaysia have required public companies to disclose the
joint provision of audit and NAS in their financial statements, where the disclosure
would “shed light on the independence of public companies’ auditors” (SEC, 2000c).

In a study of bank loan decisions, Firth (1981) discovered that smaller loans
were granted for companies that showed joint provision of audit and NAS in their
financial statements than companies that did not have such information. On the other
hand, Jenkins and Krawczyk (2001) found that joint provision of audit and NAS had a
positive impact on the perceptions of auditor independence, and also discovered that
the disclosure of the amount of NAS and audit fees was preferred by investors. In a
similar fashion, Raghunadan (2003) lent support to the SEC’s argument that
disclosure of NAS fees could influence shareholders’ voting decisions, observing that
shareholders did not consider that the provision of NAS would threaten auditor
independence even if the companies purchased very large non-audit services from
their auditors.

Schleifer and Shockley (1990) evidenced that the other two options to a total
ban on NAS, as identified by Hillison and Kennelley (1988), would improve the
perceived independence of auditors. Similarly, Gul and Yap (1984) found that the
majority of Malaysian auditors, managers, bankers and shareholders agreed that
disclosure of NAS fees would enhance perceived auditor independence. Also,
Scheiner (1984) evidenced that disclosure of NAS reduced the purchase of personnel
services from the incumbent auditor. Consistently, Schleifer and Shockley (1990)
found that over half of the Big Eight auditors and financial analysts and around a third
of non-Big Eight CPAs and loan officers opposed the policy to ban auditors from
providing joint audit and NAS. The majority of the Big Eight auditors and financial
analysts believed that disclosure of NAS would not enhance auditor independence,
while the majority of financial analysts, non-Big Eight CPAs and loan officers have
conflicting views. Lee (1993, p. 109) stressed that perceived auditor independence
would only improve if the joint provision of audit and NAS was either completely
prohibited or publicly disclosed. On the other hand, Canning and Gwilliam (1999)
found that the threat to auditor independence would be minimal when the provision of
NAS was to non-audit clients only i.e. ban NAS to audit clients.

However, Flint (1988) disagreed with the suggestion that an alternative

“organisational and constitutional structure” (p. 82) should be created for audit firms
to provide joint audit and NAS, and argued that the potential conflict of interests
would still exist. Sherer and Kent (1983, p. 27) maintained that ultimately, auditors
would be examining their own work and asking for explanations from a member of
the client’s staff in whose appointment process they had been involved (i.e. rendering
human resource services), and argued that the joint provision of audit and NAS must
be prohibited. Also, Flint (1988) argued that auditors might find themselves at a point
where they had to decide whether to criticise or to take exception to a situation where
the firm had a direct interest in the outcome of the audit that conflicted with their role
as consultants. Indeed, there would be an “economic bond or a legal bond –
particularly a bond of joint responsibility and liability” (Flint, 1988, p. 83). He argued
that audit partners would share the same level of loyalty and common understanding
either to the same firm or to affiliated firms. In fact, the firm as a whole would receive
‘net benefit’ from the NAS work brought in by the audit division, and as a result the

7
audit function would be unduly affected by “a general directorial or managerial point
of view” (Flint, 1988, p. 83).

3.0 DATA COLLECTION AND RESEARCH METHOD

To achieve the research objective, this study was undertaken in two stages. The first
stage involved the use of a postal questionnaire to seek a broad picture on the issues
of the impact of joint provision of audit and non-audit services to auditor
independence from three different respondent groups, namely auditors, loan officers
and senior managers of public listed companies. The second stage entailed a series of
interviews with senior managers of audit firms, banks and publicly listed companies
aimed at obtaining more precise understanding of the issues concerning of joint
provision of audit and non-audit services to auditor independence.

Previous research on joint provision of audit and non-audit services has

contributed to the development of the following research question: “What are the
perceptions of senior managers of audit firms, banks and public listed companies
regarding the impact on auditor independence when an auditor provides non-audit
services to an audit client?”

As the core research question of this study relates to auditors’, loan officers’ and
corporate managements’ opinions of the impact of regulatory sanctions to auditor
independence, the most appropriate approach was to solicit their perceptions directly.
The postal questionnaire is the main research tool utilised in this study, and the
selection of this tool was based on the appropriateness of the technique to the research
question. It is an effective tool to seek opinions, attitudes and descriptions about joint
provision of audit and non-audit services issues as well as assessing cause-and-effect
relationships (Ghauri and Gronhaug, 2002, p. 93). In this context, Beattie and
Fearnley (1998, p. 263) pointed out that the behavioural and qualitative technique is
important to clarify theories in accounting research because it is able to give “new
insight on the ‘relationships approach’ of audit services, which statistical models and
economic theory failed to rationalise the cause of certain events”. They further noted
that the “economic-based framework can be expected to provide only a partial
explanation…on the issue of interest” (p. 263). Gwilliam (1987) pointed out that the
concept of auditor independence is “difficult to define in absolute terms” and its
interpretation changes over time; thus, the use of questionnaires to gather the current
perceptions on auditor independence held by various interest groups could be a “more
pragmatic approach” (p. 92). Beattie and Fearnley (1998, p. 264) concurred with this:
“the use of the questionnaire approach provides richer insights than is
possible using secondary data analyses, which focuses on economic
factors, since the questionnaire instrument includes both economic and
behavioural factors.”

The questionnaire was comprehensively tested with the intent to improve and
enrich its quality, and hence to make sure that it was applicable to the current level of
practices in Malaysia in order to generate a maximum response rate. Prior to actual
distribution to auditors, loan officers and senior managers of public listed companies,
a series of pilot studies were undertaken and the comments received were found to be
useful and were incorporated into the draft questionnaire.

8
 As mentioned earlier, the population selected for the current study consists of
auditors, loan officers and senior managers of Malaysian public listed companies.
These groups were identified based on prior literature that classified them as the key
players in the audit market (FCCG, 1999). Auditors were selected because they are
the main subjects of the issue of interest that provide certification and/or information
credibility assessment to the stakeholders (Humphrey, 1997). Furthermore, Flint
(1988, p. 76) pointed that the person to whom the audit reports is addressed and the
person that are subjected to audit have a direct interest in the audit outcome. Gul
(1991, p. 165) argued that bank officers are relatively sophisticated financial
statement users who could be expected to understand the importance of auditor
independence. Finally, the manager is the agent of the principal, who conducts
business on behalf of the principal and, hence, requires a monitoring mechanism (i.e.
an auditor) to report on their performance (see Jensen and Meckling, 1976), and on
this basis, senior managers’ perceptions of auditor independence are valuable to this
study.

The total questionnaires distributed and responded are reported in Table 1,

where 31%, 44% and 36% of the questionnaires were returned from auditors, loan
officers and senior managers of public listed companies respectively.

TABLE 1 ABOUT HERE

An analysis was carried out of the designation of the respondents and details
of the findings are tabulated in Table 2. The majority of the respondents hold a high
rank in their respective organisations: 46% of the auditors who responded are in the
position of line manager, while 47% and 43% of the loan officer and corporate
management groups respectively come from senior managers, the remainder being the
first line of management and the chief executives of the respective organisations. This
result indicates that the majority of the respondents are, for the most part, responsible
for the auditing, accounting and finance function. The seniority of the respondents
provides strong support for the belief that the responses will give an authoritative
source of information on the issues of interest.

TABLE 2 ABOUT HERE

Finally, the respondents were also asked to provide their length of experience
in their particular function. It can be seen in Table 3 that more than 80% of the
respondents had more than 5 years’ experience in their respective functions. The
length of service indicates whether the respondents are well versed with their job
functions and subsequently keep informed with the changes in the accounting and
auditing profession.

The possibility of occurrence of non-response bias arises when some of the

survey sample failed to return the questionnaire and the data may consequently turn
out to be invalid4. Hence, in order to ensure the reliability and validity of the data, an
attempt to diagnose the presence of non-response bias is essential (see Bartlett and
Chandler, 1997; Mallin and Ow-Yong, 1998). Based on the technique recommended
4
It is well recognised in the literature that responses to mail questionnaires are generally poor, and it is
a common phenomenon to see return percentages as low as between 30 to 50% (Wallace and Mellor,
1988, p. 132).

9
by Oppenheim (1966) and Wallace and Mellor (1988), the first 20 questionnaires
were compared with the last 20 questionnaires. The Mann-Whitney test was employed
as a statistical tool to investigate the differences. It was found that there was no
significant difference between the 20 early and 20 late responses, implying the
absence of non-response bias.

Another source of bias in survey-type studies is self-selection bias (Eysenbach

and Wyatt, 2002; Oppenheim, 1992; Whitehead, 1991)5. The bias might arise from
the fact that “people are more likely to respond to a questionnaire if they see items
which interest them” (Eysenbach and Wyatt, 2002) and “they may try to ‘respond’
extra-well” to the questions (Oppenheim, 1992, p.30). Indeed, self-selection bias is a
result of a pre-existing interest factor, and it is more serious than the non-
representative nature of the population due to the existence of many unknown factors
(Eysenbach and Wyatt, 2002; Oppenheim, 1992). It may be that the people who
responded to the questionnaires have dissimilar characteristics to those who did not
reply.

Although no specific approach to identify self-selection bias has been

documented, this study employed two techniques. First, two groups of control and
experimental respondents were developed (Oppenheim, 1992). The control group
consisted of respondents with more than 10 years’ experience, while the experimental
group comprised of respondents with less than 10 years’ experience. Using the Mann-
Whitney test, responses from both groups of respondents from all three classifications
(i.e. auditors, loan officers and senior managers of public listed companies) were
examined, and it was found that the distribution of responses of the two groups in all
respondent classifications was not significantly different, indicating that the effect of
self-selection response bias was minimal or non-existent. Second, since this study
employed both questionnaire and interview survey approaches, the results of
interview survey tend to confirm the questionnaire survey in all variables examined.
The consistency of responses in both approaches indicates minimal or non-existent
self-selection response bias.

As mentioned earlier, the second stage of data collection involved the used of
interview survey. The aim of the interview survey was to further elaborate the issues
raised in the postal survey and to investigate the underlying reasons behind the
answers given. Based on the nature of the questionnaire used in this study (i.e. closed-
ended), it is important to probe what is happening and to seek new insights (Robson,
1993, p. 42) or get further explanation, which is limited in the postal questionnaire
survey approach. In addition, interviewees’ own behaviour or that of others, attitudes,
norms, beliefs, and values (Bryman, 2001, p. 106) on auditor independence issues
could be gathered in a more comprehensive way and not limited to restrictive
agreement levels, as in the questionnaire.

A detailed analysis of the period of employment of the respondents

participating in the interview stage is provided in Table 3.

TABLE 3 ABOUT HERE

5
Oppenheim (1992, p.30) termed this phenomenon as ‘volunteer bias’.

10
 Table 3 above shows the period of employment of interviewees that participate
in this stage of the research. The vast majority of the interviewees had more than 5
years of experience. Only 8%, 6% and 29% of the auditors, loan officers and
regulators respectively had less than 5 years of experience, and none of the senior
managers of public listed companies with that length of experience participated in the
study. Hence, with such a long period of experience in their respective functions, the
opinions provided by interviewees can be considered authoritative, and consequently
can be generalised to the whole population.

4.0 EMPIRICAL RESULTS

4.1 Mode of NAS Provision
Respondents were asked to provide their perceptions toward six mode of provision of
non-audit services; (i) provision of non audit services by audit engagement staff, (ii)
provision of non audit services by staff from separate department, (iii) provision of
non audit services by staff from different entities; (iv) audit firms are prohibited
providing non-audit services to audit client; (v) audit firms are completely banned
from providing non-audit services; and (vi) audit firms providing non-audit services
with disclosure of such provision in client financial statements. These modes of NAS
provisions were drawn from Arrunada (1999), Canning and Gwilliam (1999), Hillison
and Kennelly (1988), Kilcommins (1997), Panny and Reckers (1984), Mautz and
Sharaf (1961), Schleifer and Shockley (1990). Besides the above issues, an
opportunity was taken to probe further the reason underlying for the support of or
objection to the joint provision of audit and non-audit services to audit client by
asking respondents that participated in the interview survey.

As indicated in the methodology section, interview survey of the auditors, loan

officers and senior managers of public listed companies were undertaken to further
understand and appreciate the reason underlying respondents perceptions on mode of
provision of non-audit services, and this will be reported in the following sub-
sections.

4.2 Provision of NAS by Audit Personnel

It was found that 76% of the auditors, all of the loan officers and 91% of the senior
managers of public listed companies agreed with the statement that the provision of
NAS to audit clients by audit engagement staff would threaten auditor independence
(refer to Table 4). Although there is strong agreement from the auditors, this is less
than that expressed by the loan officers and senior managers of public listed
companies, and this might reflect the unwillingness of a minority of the auditor
respondents to acknowledge any problems that the joint provision of audit and non-
audit services by staff from the same department might bring. The result is consistent
with a study of Irish users of financial statements by Canning and Gwilliam (1999).

Analysis of the interview survey revealed that the majority of the auditors (77%), loan
officers (88%) and senior managers of public listed companies (82%) agreed that
auditor independence would be threatened if the same personnel to provide joint
provision of audit and non-audit services. This confirms the finding of the
questionnaire survey. The interviewees were concerned with the ability of the auditors
to behave independently and professionally and to resist management pressure due to
their dependence on income from both services. The interviewees disclosed that

11
auditors’ financial dependence on the client would create a tendency to threaten
auditor independence and would lead the auditors to think in the client’s way.

Furthermore, the interviews disclosed that auditors might succumb to client

pressure when there is a lack of monitoring activities. In fact, some of the
interviewees noted that auditor independence would be threatened if they were to gain
more knowledge of various aspects of the client’s business from their regular review
of the business in audit and non-audit services. Thus, they would be familiar with the
system’s weaknesses and loopholes, and as a consequence, it would be open to
manipulation. The interviewees disclosed that there is a need for different people to
independently scrutinise the audit and non-audit work.

Interestingly, the majority of the loan officers (80%) pointed out that they did
not take into account the provision of non-audit services to audit client in their
decisions on loan processing. A manager of the corporate loan division of a top bank
noted:
In analysing the financial statement for loan processing, we actually do
not look at this criterion. Perhaps it is good to know the way they operate.
But, our knowledge is limited to the information disclosed by the
company.

On the other hand, only a small number of interviewees (i.e. 23% of the
auditors; 12% of the loan officers; 18% of the senior managers of public listed
companies) disagreed with the statement that joint provision of audit and non-audit
services would threaten auditor independence and argued that auditors are
professional enough to perform their duties independently without any bias. It may be
the case that auditors are bound by their professional ethics and will not compromise
their ethical standards for the sake of their business. The occurrence of misbehaviour
among auditor was said to originate from a small and insignificant number of ‘bogus’
accountants. Indeed, the large majority of the auditors were said to adhere to the spirit
of the rules and regulations on auditor independence.

4.3 Provision of NAS by Staff from Separate Department

As an alternative to joint provision of audit and NAS by audit personnel, it was
suggested that the provision of these services should be performed by staff from
separate departments. The majority of the auditors (51%), loan officers (42%) and
senior managers of public listed companies (58%) disagreed with the statement that
auditor independence would be threatened if the provision of NAS to audit clients
were to be undertaken by staff from different departments within the same firm (Table
4), and this might reflect the respondents’ confidence in the safeguards of auditor
independence from the segregation of duties by splitting the provision of audit and
NAS into separate departments, which is consistent with Canning and Gwilliam
(1999) and Pany and Reckers (1984). Indeed, the separation of personnel is one of the
alternatives to a total ban on the joint provision of audit and NAS (Hillison and
Kennelly, 1988).

In the interview survey, the vast majority of the auditors (85%), loan officers
(71%) and senior managers of public listed companies (59%) indicated that auditor
independence would not be threatened if the provision of audit and non-audit services
to audit client was performed by staff from different departments, which is consistent

12
with the result of questionnaire survey. The interviews disclosed that this mode of
NAS provision would allow segregation of duties in monitoring activities, widely
known as the ‘Chinese Wall’ (Mikol and Standish, 1998). It was believed that
different partners would handle the different departments, which would result in
greater monitoring activities and mean that the audit division might not lose sight of
the material issues. As a manager of a Big Four audit firm pointed out:
You may not detect the errors that you made yourself. By having different
departments, at least someone else is looking into your work, rather than
you performing both of the services.

In fact, some of the interviewees argued that auditors are still good candidates
for provision of NAS to their audit clients, due to their understanding and knowledge
of clients’ business operations, which would speed up the process and allow them to
deliver better quality services. A chief executive of a merchant bank remarked:
I think it is good to have separate departments that perform the services
rather than one person wearing two hats, but ultimately it goes back to the
people, their professionalism and their characters.

Also, some of the interviewees indicated that this kind of arrangement would
ease information exchange, which may not be achieved if NAS are provided by other
firms. Perhaps, audit firms could effectively utilise their personnel who have a good
understanding of the client’s business to speed up the process and subsequently
produce a high quality financial statement.

However, a small minority of the interviewees disclosed that the provision of

non-audit services by a separate department would threaten auditor independence.
They were sceptical about the ability of audit firms to ensure total segregation of
duties, and suggested that most audit firms would try to achieve economies of scale by
allocating idle staff to any department within the same firm that required their
services. Also, some of the interviewees expressed concern about the ability of
auditors to act professionally and differentiate between friendship and responsibility
to the general public. They indicated that partners in the same audit firm that perform
audit and non-audit services are closely connected.

4.4 Provision of NAS by Staff from Separate Entity

As shown in Table 4, 74 percent of the auditors, 85 percent of the loan officers and 58
percent of the senior managers of public listed companies indicated that auditor
independence would not be threatened when the provision of NAS to audit client is
done by a separate entity where the auditors have an interest. Perhaps, the attitude
demonstrated by the respondents in this issue indicate their support in the “Chinese
Wall” concept that received much attention among Malaysian professionals recently.
The increase in respondents support in this issue indicate the objective to segregate
job functions between audit and NAS would be more attainable when exist separate
entities to handle different responsibilities as compared to separation of department.

The interview survey result is consistent with the above finding, in that as
many as 92% of the auditors, 94% of the loan officers and 82% of the senior
managers of public listed companies interviewed agreed that the provision of audit
and non-audit services by separate entities would safeguard auditor independence.
The interviews disclosed that this mode of provision of NAS would safeguard auditor

13
independence due to the structure of audit and non-audit firms, which would ensure
greater transparency of financial reporting (i.e. a Chinese Wall). When different staff
from different entities are handling the assignments, most of the interviewees
indicated that each entity would act independently and perform ‘checks and balances’
on each other’s work. Therefore, the majority of the interviewees disclosed that it
would act as a deterrent to auditors against compromising their independence.

Although the majority of the loan officers supported the notion that auditor
independence would not be threatened if separate entities existed to perform these
different services, it was discovered that most of the Malaysian bankers did not take
into account the methods of provision of NAS to audit clients in their daily duties of
loan processing as indicated in the above sub-section. The interviews indicated that
Malaysian auditors were currently performing a good job and producing reliable
financial statements. These loan officers may have come to hold this view due to a
lack of disclosure of non-audit services in financial statements. Regarding the loan
officer’s belief, a manager of a corporate loan department of a local bank revealed his
experience in analysing corporate loan applications:
… as bankers, we don’t take into account whether there is a segregation
of duties between audit and other services. We accept the accounts as
good, as long they are audited and there is a stamped, signed declaration
by the auditor, that’s good enough for us. It doesn’t matter whether they
provide non-audit services to the company.

In addition, the interviews disclosed that the separation of entities is an

effective way to minimise the auditor independence dilemma because audit partners in
the different entities do not have any direct interests, either financial or personal, that
would cause them to compromise their objectivity. A manager of a Big Four firm
noted:
They do not directly share the same pool of revenue and profit. Thus, each
of them will protect their interest and professionalism and will conduct
their business objectively.

On the other hand, the small minority of the interviewees who were opposed
to the suggestion to separate the entities contended that staff from different entities
that undertake audit and non-audit services still belong to the same organisation and
will ultimately report to the same group of partners. Their concern was focused on the
willingness of partners within the same firm to expose the weaknesses, mistakes and
wrongdoings of their colleague to the regulators or the public, hence, damaging the
firm’s reputation. A chief internal auditor of a public listed company pointed out:
All of them will report to the same partner, unless they have formalised
some internal controls that are transparent to outsiders, which most of
them claim that they have done; sure, they can say they have separate
systems, they have separate reporting lines. However, who checks all
these claims? Nobody checks the auditors. I don’t know who audits their
accounts, or what the accounts look like. Right now the disclosure of work
is only on the clients’ annual reports, not on their part. So when it comes
to monitoring their independence, how do you do that?

14
Furthermore, the interviews revealed that users of financial statements might be
misled by the different names under which both services were performed, when in
actual fact the same person was running the firms.

4.5 Provision of NAS to Non-Audit Client and Total Prohibition

The majority of the respondents disagreed with the statement that auditor
independence would be reduced if auditors were only allowed to provide non-audit
services to non-audit clients. Although there is strong disagreement with the statement
from the auditors (66%) and senior managers of public listed companies (88%), this is
less than that expressed by the loan officers (99%), as shown in Table 4, and this
might reflect the confidence of the loan officers in the safeguard to auditor
independence created from the prohibition of provision of NAS to audit clients. This
result is consistent with Canning and Gwilliam (1999). In fact, an exploratory study
conducted by Teoh and Lim (1996) in Malaysia suggested that there is a need to
restrict the provision of consulting services to non-audit clients. The result might be a
sign of the need for auditors to concentrate on their main function, to provide
assurance as to the truth and fairness of clients’ accounts, and not involve themselves
in providing non-audit services to audit clients. In addition, the responses shown by
the majority of the respondents might reflect their belief that auditors should
concentrate on providing one kind of service to their clients, either audit or non-audit
services, as this would reduce the risk of conflict of interest (see Canning and
Gwilliam, 1999).

Opponents to the joint provision of audit and NAS have pointed out that
auditors should be banned from providing NAS (e.g. Flint, 1988; Sherer and Kent,
1983). It was observed that the majority of the respondents disagreed with the
statement that auditor independence would be reduced if auditors were prohibited
from providing non-audit services. Although there is strong disagreement from the
auditors (61%) and senior managers of public listed companies (62%), this is less than
that expressed by the loan officers (71%), as shown in Table 4, and this might reflect
the loan officers’ concern with the potential drawbacks associated with the joint
provision of audit and NAS to audit clients.

When the interviewees were asked about the issue of limiting the provision of
NAS to non-audit clients or completely prohibiting auditors from providing NAS, all
of them agreed that both approaches would safeguard auditor independence, which is
consistent with the questionnaire survey findings. Discussing the potential
improvement to auditor independence, a director of a merchant bank remarked:
I think the scope would be less, if you ask me about impairment. I don’t
see total elimination, I see less, the reason being because I think the
business world today is based on networking and contacts, so it is more
likely that the audit firm might actually introduce whatever tax consultant,
financial consultant, at the end of the day I mean we hate to say this, but
there might be a certain kick back, there might be certain other benefits
derived somehow, somewhere.

However, the interviews disclosed that the prohibition would be too stringent
for local accounting profession, where there are other possible alternatives to
overcome auditor independence issues. They indicated that the Malaysian accounting
profession would severely resist this suggestion, due to the fact that fees from NAS

15
could compliment their low incomes from audit fees, and pointed out that there is lack
of financial services experts in Malaysian capital market to replace those audit firms.
A chief of an internal audit department of a public listed company remarked:
If you look at the accounting firms, there are not many of them out there.
We hate to lose some of the good work done by the KPMG or
PriceWaterHouse or Ernst and Young and others. They are good
consultants and also good at auditing statutory accounts. If you prohibit
the business altogether, you’ll lose that expertise and talent. Why would
we go and shoot ourselves in the foot?

Therefore, the majority of the interviewees felt that these suggestions were not
the best solutions to the problem faced by the profession.

4.6 Joint Provision of Audit and NAS with Full Disclosure in Client’s
Financial Statement
As shown in Table 4, a sizeable percentage of the auditors (40%), loan officers (30%)
and senior managers (42%) disagreed with the statement that auditor independence
would be reduced if full disclosure on NAS were to be made in the clients’ financial
statements, and this might reflect the confidence of the respondents in the potential
benefits that disclosure on NAS might bring.

When interviewees were asked about what impact full disclosure in the
client’s financial statement of the provision of NAS by auditors to audit clients would
have on auditor independence, about half of the auditors (54%), loan officers (53%)
senior managers of public listed companies (53%) and senior managers of regulatory
bodies (59%) agreed that this approach would safeguard auditor independence, which
is consistent with the questionnaire survey findings.

The interviews disclosed that such disclosure could inform shareholders and
regulators about auditors’ involvement in clients’ companies, and would trigger them
to ask questions about the auditors’ relationship with management. The interviews
indicated that such disclosure would allow shareholders and the general public to
assess the amount of money paid to the auditor and ask questions if they were not
comfortable with the figures. A partner of a medium size audit firm noted:
It will create awareness among the public, shareholders and stakeholders.
It also triggers them to ask question in the AGM, like ‘Who is the auditor
and consultant, and how will the management ensure there is a split of
independency between the two?’ If we don’t have such disclosure, it is not
fair to the public, who have a lack of knowledge on the operation side.

Some of the interviewees disclosed that many Malaysian investors did not care
about accounting disclosure in financial statements, and were more concerned about
the company’s profits and payment of dividends. It was argued that a majority of
small investors would not pay much attention to this type of disclosure. A financial
controller of a second board company described her experience as follows:
I have attended so many AGMs, and none of the shareholders ask
questions. They are not really interested in what the company does, and as
long as the company pays dividend, they’ll keep quiet. They don’t really
try to understand the business of the company. We don’t have people that

16
 stand up and ask questions like ‘why we are paying so much for
consultancy?’

This argument was further supported by a vice president of a listed company,

who added:
I supposed it also depends on the type of shareholders that we have. In
general, Malaysian shareholders are still not aware of their rights, and do
not question this issue during the AGM. If the majority of shares are
controlled either by a single entity or a family, the minority shareholders
may not ask the company or director questions.

The interviews disclosed that Malaysian regulators should require the disclosure to
include further details that outline the type of non-audit services provided, together
with the amount of fees paid for the services and not only the total amount, as
practiced currently.

4.7 Analysis of Mode of NAS Provision

An attempt was made to identify whether exist significant differences of perceptions
on mode of NAS provision using non-parametric tests (i.e. Friedman two-way
ANOVA). As shown in Table 5, the respondent’s perceptions on the mode of NAS
provision are significantly different, where the NAS provision by audit personnel was
found as the most threat to auditor independence in all groups (i.e. auditors, loan
officers, senior managers of public listed companies and overall).

TABLE 5 ABOUT HERE

TABLE 6 ABOUT HERE

In Table 6, matched pairs of mode of NAS provision was made with the aim to
identify whether significant differences exist in perceptions of auditor independence.
Using the Wilcoxon matched pairs signed ranks tests; each methods of NAS provision
were compared. For example, the NAS provision by audit personnel was exclusively
compared with the other five mode of NAS provision (i.e. separate department,
separate entity, non-audit clients only, not provided at all, and full disclosure). Based
on the Wilcoxon matched pairs signed ranks tests, the provision of NAS to audit
clients by audit personnel was found as the most threat to auditor independence.

5.0 CONCLUSIONS
This study investigates the perceptions of Malaysian auditors, loan officers and senior
managers of public listed companies on the effect of joint provision of audit and non-
audit services to auditor independence. The majority of the respondents agreed with
the statement that the provision of NAS to audit clients by the audit engagement team
would threaten independence. Perhaps, this might indicate the respondents’ concern
about the ability of auditors to independently act as a watchdog to assure the truth and
fairness of clients’ accounts, and at the same time to perform their NAS duties to
advise and consult with the client. The main concern indicated by the interviewees
was with the ability of the auditors to behave independently due to their dependence
on income from both services. Also, there would be a lack of ‘checks and balances’ if
both duties were to be performed by the same person. Further analysis using the
Friedman two-way ANOVA and Wilcoxon matched pairs signed ranks tests indicate

17
that the joint provision of audit and NAS to audit clients by audit staff as the most
threat to auditor independence.

On the other hand, the majority of the respondents agreed that auditor independence
would not be threatened if the provision of audit and NAS were to be provided by
staff from a separate department and entity. The result indicates that the respondents
had faith in the segregation of duties or ‘Chinese Wall’ offered by these approaches.
Though the departments and entities are under the same ultimate control or belong to
the same firms, the level of communication between both parties is minimal, because
each of them is responsible for the operation of their own department/entity.
Consistently, the interviews indicated that auditor independence would not be
threatened if staff from separate departments or entities were to provide audit and
NAS. It was mentioned that these modes of provision of NAS would allow
segregation of duties, which would result in greater monitoring activities. Despite the
consistent view among the respondents, it was pointed out that the loan officers did
not consider the method of provision of NAS as an important issue in their daily
duties of loan processing because they believed that the auditors were currently doing
a good job and producing reliable financial statements.

In addition, the majority of the respondents indicated their agreement that the threat to
auditor independence would be less if the provision of audit and NAS were limited to
non-audit clients or if it was completely prohibited for auditors to provide joint
services, which the interview survey confirm the findings. However, these approaches
are indicated to be too stringent and would be severely resisted by the profession
because income from NAS complements the low income derived from audit services
for some audit firms. The results suggest that auditors should concentrate on one type
of service: either auditing or NAS. Through concentrating on audit or non-audit
services, the risk of conflict of interest could be reduced or eliminated. Finally, the
majority of the respondents agreed that auditor independence would be safeguarded if
auditors were to provide full disclosure in client accounts following the provision of
NAS. In interview survey, it was revealed that such disclosure could inform
shareholders and regulators about the auditor’s relationship with the company, while
some of the interviewees contended that the Malaysian investors did not care about
accounting disclosure because they were more concerned about the company’s profits
and payment of dividends. The result might suggest that the users become aware of
the level of relationship between auditors and clients’ management, and could
question both parties on any issues about which they need further clarification during
the annual general meeting.

Based on the findings of this study, it is recommended that the best alternative
to prohibiting audit firms from providing NAS is a proper segregation of duties
between staff that perform audit services and NAS. This segregation of duties should
be in the form of separate departments or entities, where different partners and team
provide the two services. Audit partners should not be involved, directly or indirectly,
in the provision of NAS or even in the marketing of these services. In order to monitor
this practice, each audit firm and its NAS arm should lodge its organisation profile,
which should clearly state the identities of the audit team and the NAS team, with the
MIA. In addition, future research should examine the perceptions of corporate
participants on the impact of provision of specific type on NAS to auditor
independence.

18
The limitation of this study is that only perceptions of auditors, loan officers and
senior managers of public listed companies were sought. Future research should
solicit the perceptions of other stakeholders’ groups, such as institutional investors,
regulatory bodies, academicians, foreign investors, audit committee members,
politicians and the public. Also, this study was undertaken in a period when
Malaysian auditing market is still in the process of reforming and strengthening its
control mechanisms, consistent with worldwide development. Following the recent
well-publicised audit failures, regulators worldwide, including those in Malaysia, are
searching for better solutions to tackle the dilemma. Thus, many of issues relating to
non-audit services and auditor independence are hotly debated, which could create
some form of bias in the perceptions of respondents because they have got excited
through their readings and discussions. Furthermore, continuous efforts to carry out
research on the subject of interest should be undertaken, because the perceptions of
auditor independence may shift over time as highlighted by researchers such as
Gwilliam (1987).

19
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 Appendix 1

Table 1: Analysis of Responses by Respondent's Category

Usable Usable Usable Total
Total Responses Responses Responses Total Usable
Questionnaires Received Received Received Usable Response
Category Issued Pre-reminder Post-reminder 1 Post-reminder 2 Response Rate
Frequency Frequency Frequency Frequency Frequency %
Audit Firms 300 25 30 38 93 31
Financial
Institutions 200 32 28 27 87 44
Public Listed
Companies 300 42 16 49 107 36
Total 800 99 74 114 287 36

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 Table 2: Profile of Postal Survey Respondents Analysed by Category of Employment
Auditors Loan Officers Senior Managers
Status Number % Status Number % Status Number %
Audit Senior 38 41 Officer 34 39 Financial Accountant 36 34
Line Manager 43 46 Senior Manager 41 47 Senior Manager 46 43
Senior Manager 12 13 Chief Executive 12 14 Chief Executive 25 23
Total 93 100 87 100 107 100

Table 3: Analysis Showing the Period of Employment of Respondents Participating in

the Interview Survey
Senior Senior
Manager of Manager of
Public Listed Regulatory
Auditors Loan Officers Companies Bodies
Level of Experience Number % Number % Number % Number %
Under 5 years 1 8 1 6 0 0 2 29
Between 6 and 10 years 3 23 3 18 3 18 0 0
Between 11 and 15 years 5 38 5 29 6 35 4 57
Between 16 and 25 years 2 16 7 41 5 29 0 0
More than 25 years 2 15 1 6 3 18 1 14
Total
13 100 17 100 17 100 7 100

28
 Table 4: Analysis Showing Perceptions of the Method of NAS Provision
Auditors (N=93) Loan Officers (N=87) Senior Managers (N=107) Significance
Disagree No Agree Mean Disagree No Agree Mean Disagree No Agree Mean
The independence of the auditor, for the purpose View View View
of audit, is reduced if NAS are % % % % % % % % %
Provided to audit clients by personnel involved in
audit 21 3 76 2.56 - - 100 3.00 6 3 91 2.84 ***
Provided to audit clients by a separate department
within the audit firm 51 15 34 1.83 42 20 38 1.95 58 11 31 1.73
Provided to audit clients by a separate entity where
the auditors have an interest 74 14 12 1.38 85 1 14 1.29 58 18 24 1.66 ***
Provided to non-audit clients only 66 24 10 1.44 99 1 - 1.01 88 12 - 1.12 ***
Not provided at all 61 39 - 1.39 71 29 - 1.29 62 32 6 1.44 **
Provided by the auditor to all clients but full
disclosure is made in the client financial statements 40 60 - 1.60 30 54 16 1.86 42 40 18 1.76 *
Note: ***, **, * indicates that the distribution of responses is significantly different at 1%, 5% and 10% level (using the Kruskal Wallis test).
The responses were reported on a 5-point scale ranging from 1 (strongly disagree), through 2 (disagree), 3 (no view), 4 (agree) to 5 (strongly agree). For presentational purposes these 5 points
have been collapsed into disagree (scored 1), no view (scored 2) and agree (scored 3) and the reported means are calculated on this collapsed scale. However, the significance tests are based on
the full 5-point distribution of responses.

29
 Table 5: Impact of Method of Provision of Non-Audit Services (NAS) on Perceived Auditor Independence
Mean Rank of the Friedman Two-Way Anova
The independence of the auditor, for the purpose of audit, is reduced if NAS are Overall* Auditor Loan Officer Manager
n=287 N=93 n=87 n=107
provided to audit clients by personnel involved in audit 5.35 5.04 5.66 5.37
provided to audit clients by a separate department within the audit firm 3.65 3.71 3.87 3.41
provided to audit clients by a separate entity where the auditors have an interest 2.94 2.83 2.58 3.31
provided to non-audit clients only 2.51 3.02 2.17 2.34
not provided at all 2.90 2.87 2.80 3.01
provided by the auditor to all clients but full disclosure is made in the client financial
statements 3.66 3.53 3.91 3.56

*χ²=561.326, p<0.0001

Note: The higher the mean rank, the more the respondents agreed with the statements.

30
 Table 6: Comparison of Method of Provision of Non-Audit Services (NAS) and its Impact
to Perceived Auditor Independence

Wilcoxon Matched-Pairs Signed Ranks Tests

Method of - Ranks + Ranks Ties Test Results
Provision of MR (Cases) MR (Cases) (Cases)
NAS
B&A 106.44 (185) 114.24 (29) (73) z= -9.740; p<0.0001*
C&A 105.50 (210) 0.00 (0) (77) z= -13.5869; p<0.0001*
D&A 142.89 (248) 18.00 (19) (20) z= -15.1920; p<0.0001*
E&A 127.63 (251) 47.50 (2) (34) z= -14.2475; p<0.0001*
F&A 117.84 (225) 73.50 (7) (55) z= -13.2041; p<0.0001*
C&B 93.25 (120) 85.0 (60) (107) z= -14.548; p<0.0001*
D&B 73.39 (133) 79.75 (14) (140) z= -8.644; p<0.0001*
E&B 94.66 (116) 53.13 (48) (123) z= -7.163; p<0.0001*
F&B 116.11 (93) 79.23 (100) (94) z= -1.917; p<0.0001*
D&C 54.57 (66) 28.50 (27) (194) z= -5.6235; p<0.0001*
E&C 85.45 (66) 54.88 (72) (149) z= -1.8991; p=0.0575*
F&C 95.50 (29) 67.38 (116) (142) z= -5.4307; p<0.0001*
E&D 54.00 (31) 56.78 (80) (176) z= -4.7802; p<0.0001*
F&D 106.70 (28) 94.16 (163) (96) z= -8.6361; p<0.0001*
F&E 69.50 (41) 85.57 (121) (125) z= -6.8213; p<0.0001*
A: NAS provided by audit personnel; B: NAS provided by a separate department; C: NAS
provided by a separate entity; D: NAS provided to non-audit clients only; E: NAS not provided
at all; F: NAS provided but full disclosure

* Two tailed probability; MR=Mean Rank

-Ranks: Respondents agreed less that independence would be threatened if the first rather than
the second method of NAS provision were adopted.

+ Ranks: Respondents agreed more that independence would be threatened if the first rather
than the second method of NAS provision were adopted.

31

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