The Economic Determinants of Fees for Non-Audit Services Provided by the Incumbent Auditors - Evidence of Korean Listed Firms

The Economic Determinants of Fees for Non-Audit Services Provided by the Incumbent Auditors

  This study examines the economic determinants of the magnitude of fees paid for non-audit services provided by the incumbent auditors among Korean listed firms over the period 1999-2002. Only 26% of the sample firm-years exhibit positive non-audit service fees, compared to 96% among U.S. listed firms, suggesting that recent regulatory concerns on potential lack of auditor independence due to provision of non-audit related services may not be as severe among Korean listed firms as in the U.S.   Unlike U.S. firms, Korean listed firms provide detailed descriptions of their incumbent auditors" non-audit services, allowing us to develop a rich taxanomy of non-audit activities including tax, routine management-related, information-technology, innovation, and valuation. A notable finding is that investments in innovation-related services occur the most often across industries, indicating increased demands for improving business efficiency among Korean firms.   In examining the economic determinant of the level of non-audit service fees, this study specifically controls for firms" decision to purchase non-audit services using a self-selection model. Based on a Heckman two-stage estimation, we posit that firms simultaneously determine whether to purchase non-audit services and the level of investments in non-audit services conditional upon the purchase of non-audit services. The evidence shows that the firms" decision to buy non-audit services is distinct from their decision on the level of investments in non-audit services. This evidence suggests that estimating a model for the economic determinants of non-audit fees without correcting for this self-selection bias can lead to an erroneous inference on the determining factors underlying non-audit services.