THE IMPACT OF NON-AUDIT SERVICE FEE DISCLOSURE REQUIREMENTS ON AUDIT FEE AND NON-AUDIT SERVICE FEE IN THE UNITED KINGDOM: AN EMPIRICAL ANALYSIS

Since the early 1990s the accounting profession has been in the midst of a debate about the deleterious effects of public accounting firms providing non-audit services to their audit clients. In response to increasing demand for regulation curbing the growth of non-audit services provided by auditing firms and to provide greater transparency of the auditor-client relationship, the SEC adopted rule amendments regarding auditor independence. One such rule requires public companies to disclose among other things, fees paid to auditors for rendering non-audit services. In the United Kingdom, the Companies Act 1989 (Disclosure of Remuneration for Non-Audit Work) 1991 Regulations required disclosure of non-audit service fees paid to the incumbent auditor for years ending on or after September 30th, 1992. The purpose of this study is to explore the effect of such disclosure requirement on audit fee and non-audit service fee. Based on a sample of 156 companies in the United Kingdom we find that there were significant differences in the level of non-audit service fee and ratio of non-audit service fee to audit fee for companies that voluntarily disclosed 1991 non-audit service fee and companies that did not disclose 1991 non-audit service fee. Also, a comparison of the trends in audit fee and non-audit service fee between these two groups from 1991 to 1994 indicated that the disclosure requirement had some limited effect in curbing the growth in non-audit service fee. Furthermore, audit fees were positively related to non-audit service fees and a first-difference regression ( Iyer & Iyer, 1996; Maher et al., 1992) revealed that changes in audit fee were also positively related to changes in non-audit service fee.