Resumen de la clasificación de los parques empresariales

3.3.1.1Audit quality and auditor independence

The purpose of statutory audits is to verify that financial statements are a fair presentation of a company’s financial situation and that they are prepared in accordance with the applicable accounting standards31. By performing the necessary audit procedures, the auditor attests with reasonable assurance that financial statements are free from material errors32. As the auditor’s work is fundamental for the credibility of financial information and the functioning of the capital market, it must be carried out with sufficient audit quality33.

According to the definition of DeAngelo (1981a), audit quality is the auditor’s perceived ability to detect misstatements and to report them34. To be able to detect misstatements in the first place, the auditor must be competent, which means possessing the necessary technical capabilities and executing the correct audit procedures35_{. The second determinant of audit quality is auditor}

independence or in other words his willingness to report any material misstatements. Being independent means to be free from personal and economic influences that can compromise professional judgement, integrity and objectivity36. This aspect, called independence of mind or independence in fact, is necessary but not sufficient, as the auditor must also be perceived as independent. To achieve independence in appearance the auditor should avoid facts and conditions, which can make him appear less than perfectly independent in the eyes of an informed third party37.

31 _{ISA 200.3} 32 _{ISA 240.5}

33 _{See also the similar considerations made in Fiallo/Hecker (2019a), pp. 226-227.}

34 _{DeAngelo (1981b), p. 186. This definition provided by DeAngelo is commonly used in auditing literature, see e.g.}

Fiallo/Hecker (2019a), p. 226.

35 _{Köhler/Marten/Meuwissen/Quick (2013), p. 242.} 36 _{IESBA (2018), sec. 120.12 A1.}

68 The provision of NAS might threaten independence in several ways38. First, the advisory activity frequently involves an intensive collaboration between the auditor and the company’s representatives. This might lead the auditor to develop a trusting relationship with the client (familiarity threat)39. Also, the provision of services that involve promoting or defending a client’s position, might lead the auditor to identify with the client (advocacy threat). In these cases, the provision of NAS might contribute to social bonding40, which in turn would reduce the auditor’s objectivity and professional scepticism. Second, the more extensive the services the auditor provides, the higher the probability that he will have to assess his own work (self-review threat). In this case, the auditor will lack objectivity. Third, the provision of NAS may increase the financial interest the auditor has in the client (self-interest threat), which might lead to impaired independence, especially if the client threatens him with the termination of the contract (intimidation threat).

The impact each threat has on auditor independence depends on the existence of safeguards41_{. For}

example, the existing limitations on certain NAS reduces the possibility of self-review. Due to the organisational structure of many audit firms, audit services and NAS are often provided by different teams, which might decrease the risk of social bonding. Regarding economic bonding, the regulator seems to think that limiting the provision of certain NAS and the amount of fees an auditor can obtain from a client might improve independence by reducing the self-interest threat42. The next section presents the conceptual framework behind economic bonding on the base of the quasi-rents model developed by DeAngelo (1981a).

3.3.1.2Economic bonding and knowledge spillovers

In a world where the audit market is perfectly competitive due to all auditors having the same technological capabilities, the incumbent auditor has a cost advantage compared to other potential

38 _{According to IESBA (2018), sec. 120.6 A3, the threats to independence can be classified in five categories: self-}

interest threat, self-review threat, advocacy threat, familiarity threat and intimidation threat.

39 _{Typically, the familiarity threat arises when the auditor and the client work together for many years, which is an}

argument in favour of limiting the duration of audit engagements, see e.g. Fiallo/Hecker (2019c), p. 344.

40 _{Hohenfels/Quick (2018), OnlineFirst 25 October 2018. Available at:}

https://link.springer.com/article/10.1007/s11846-018-0306-z.

41 _{See also the similar considerations made by Tebben (2011), pp. 224-225.}

42 _{Recital 7 and 8 EU-reg. In this study, I focus on the issue of economic bonding. To what extent limiting the provision}

of NAS also helps in reducing social bonding remains unclear, due to the difficulties in disentangling the consequences of economic and social bonding. According to recital 21 EU-reg., limiting the duration of the audit engagement should reduce the familiarity threat and the risk of social bonding. These aspects are further discussed in Fiallo/Hecker (2019c), pp. 344-347.

69 auditors due to the start-up costs a new auditor would face and to the transaction costs, the audited company would sustain when switching auditor43. The incumbent auditor is therefore able to set the audit fees above the audit costs, being able to obtain client-specific quasi-rents from future audits.

The existence of quasi-rents has two consequences: first, to win the client the auditor is willing to reduce the fees for the initial audit below the actual costs, so called low-balling44; second, the auditor needs to be reappointed to earn the quasi-rents. While the costs related to low-balling are sunk and do not affect the auditor’s decisions, the existence of quasi-rents and the willingness to retain them might impair auditor independence. Under these circumstances, the auditor’s decisions might be affected by his fear of dismissal. Usually, managers cannot directly threaten the auditor with the termination of the audit engagement (e.g. in German public companies, the auditor is chosen by the shareholders’ meeting on a proposal of the supervisory board45_{). However, they}

might be able to influence the appointment, e.g. if asked to express an opinion on the work of the auditor, or in those cases where the interests of management and supervisory board are aligned46. Moreover, managers might exert pressure on the auditor by withdrawing contracts for NAS47_.

Since auditors usually have more than one client, the risk posed by client-specific quasi-rents must be evaluated considering also the quasi-rents generated by other clients48. If an auditor fails to report a misstatement and this information becomes public, he might suffer damage to his reputation, which could lead to the loss of other clients49. The auditor’s reporting decision results therefore from the cost-benefit consideration of keeping a client against the probability of being discovered “cheating” and losing other clients. It follows that even though quasi-rents of a specific client are a threat to independence, quasi-rents of other clients are “a collateral against opportunistic behaviour”50.

43 _{DeAngelo (1981a), pp. 118-123.}

44 _{The auditor is willing to reduce the fees until the point where the net present value of the engagement becomes zero,}

see DeAngelo (1981a), p. 122.

45 _{Sec. 318 para. 1 sentence 1 HGB and sec. 124 para. 3 AktG.}

46 _{Lopatta/Kaspereit/Canitz/Maas (2015), p. 565; Qandil (2014), pp. 95-97.} 47 _{Qandil (2014), pp. 95-97.}

48 _{DeAngelo (1981a), p. 117; DeAngelo (1981b), p. 184. Similar considerations are included in Fiallo/Hecker (2019b),}

p. 296.

49 _{Evidence on the existence of reputation concerns, which counteract the economic interest, have been found by}

Larcker/Richardson (2004), p. 655.

70 The quasi-rents model has subsequently been extended with the inclusion of a market for NAS51. There might be several advantages related to the simultaneous provision of audit and non-audit services52. As client and auditor have already established a relation, transaction costs related to the purchase of NAS may be lower for both parties. Further, the provision of NAS might generate economies of scope as the auditor can transfer knowledge among audit and non-audit services. It follows that knowledge spillovers can make the joint provision of audit and non-audit services cheaper than their separate provision. The additional knowledge gained through the provision of NAS can generate an information advantage, which might improve the auditor’s ability to detect errors thus increasing audit quality53.

Prior studies have looked for evidence of knowledge spillovers. Simunic (1984) finds that auditors providing additional NAS are payed higher audit fees compared to auditors, who do not render any NAS, which might indicate that the cost functions of audit and non-audit services are interdependent due to knowledge spillovers54_{. These findings are only partially replicated by}

Palmrose (1986), who finds a positive relation between audit and non-audit fees also when NAS are not provided by the incumbent auditor55_{. Any evidence of the existence of knowledge spillovers}

indicates that there are cost benefits due to the joint provision of NAS and audit services. However, it remains unclear if this positively affects audit quality, as the cost savings might increase the quasi-rents due to the additional cost advantage the incumbent auditor has from NAS-related start- up and switching costs56.

Beck/Frecka/Solomon (1988) argue that non-recurring NAS increase the economic bond, as cost savings increase the value of future rents, while recurring NAS may decrease the incremental bonding and, when the cost savings in audit start-up costs exceed NAS start-up and switching costs, even the total bonding57. These results are criticised by Ostrowski/Söder (1999), who argue that under more realistic assumptions the provision of NAS always impairs auditor independence58.

51 _{E.g. Beck/Frecka/Solomon (1988); Simunic (1984); Ostrowski/Söder (1999).}

52 _{For considerations made in this regard, see e.g. Simunic (1984), p. 680; Zwernemann (2015), pp. 39-50; Sattler}

(2011), pp. 67-76; Arruñada (1999), pp. 513-515; Lange (1994), pp. 28-32.

53 _{Knowledge might be transferred also from audit services to NAS. For evidence that knowledge spillovers move in}

this direction, see Antle/Gordon/Narayanamoorthy/Zhou (2006), p. 258.

54 _{Simunic (1984), pp. 681, 689.} 55 _{Palmrose (1986), p. 406.}

56 _{Beck/Frecka/Solomon (1988), pp. 57-61; Ostrowski/Söder (1999), pp. 559-560.} 57 _{Beck/Frecka/Solomon (1988), pp. 57-61.}

71 Arruñada (1999) suggests putting the client-specific quasi-rents in relation to all quasi-rents from other clients, which are also higher due to the provision of NAS59. He concludes that the risk to independence should be evaluated by considering all the auditor’s clients, and that client diversification prevents opportunistic behaviour.

In conclusion, the provision of NAS might generate knowledge spillovers, which would make the joint provision of audit and non-audit services convenient. The extent to which this is beneficial to audit quality remains unclear. On the one hand, the additional knowledge and information gained through the provision of NAS might increase the ability of the auditor to detect errors60, on the other hand, the provision of NAS might generate additional quasi-rents, also due to the cost savings related to knowledge spillovers, which might strengthen the economic bond and lead to impaired independence.