TY - UNPB
T1 - A Tale of Two Outcomes: Non-audit Services and Auditor Independence After the EU Audit Directive and Regulation (EU ADR)
AU - Holmes, Mark
PY - 2026/3/31
Y1 - 2026/3/31
N2 - This study evaluates whether the EU’s Audit Directive and Regulation (EU ADR) changed the relationship between auditor provided non-audit services (NAS) and auditor independence in the UK. While NAS can create economic bonding that suppresses negative reporting, it may also generate knowledge spillovers that improve the auditor’s client-specific knowledge and reporting quality. Using UK-listed, UK-headquartered non-financial firms from 2010-2020, we examine whether EU ADR implementation moderated NAS-related economic incentives across two reporting thresholds; qualified opinions and going-concern comments. Our study finds no evidence that NAS is associated with audit qualifications, nor that EU ADR changed this relationship. In contrast, we document a significant post-EU ADR shift in the NAS-going-concern comment relationship. Prior to the EU ADR, higher NAS was associated with a lower likelihood of going-concern comments; after implementation this negative association is significantly attenuated, that is consistent with reduced economic bonding in discretionary reporting. Similarly, probability-scale effects indicate economically meaningful changes in going-concern comment behaviour, while high-threshold, qualification decisions, remain largely unchanged. Results are robust to alternative specifications and audit firm heterogeneity. Overall, engagement-level NAS restrictions appear to matter primarily where auditors retain reporting discretion, informing debates on structural reforms such as the UK’s operational separation policy.
AB - This study evaluates whether the EU’s Audit Directive and Regulation (EU ADR) changed the relationship between auditor provided non-audit services (NAS) and auditor independence in the UK. While NAS can create economic bonding that suppresses negative reporting, it may also generate knowledge spillovers that improve the auditor’s client-specific knowledge and reporting quality. Using UK-listed, UK-headquartered non-financial firms from 2010-2020, we examine whether EU ADR implementation moderated NAS-related economic incentives across two reporting thresholds; qualified opinions and going-concern comments. Our study finds no evidence that NAS is associated with audit qualifications, nor that EU ADR changed this relationship. In contrast, we document a significant post-EU ADR shift in the NAS-going-concern comment relationship. Prior to the EU ADR, higher NAS was associated with a lower likelihood of going-concern comments; after implementation this negative association is significantly attenuated, that is consistent with reduced economic bonding in discretionary reporting. Similarly, probability-scale effects indicate economically meaningful changes in going-concern comment behaviour, while high-threshold, qualification decisions, remain largely unchanged. Results are robust to alternative specifications and audit firm heterogeneity. Overall, engagement-level NAS restrictions appear to matter primarily where auditors retain reporting discretion, informing debates on structural reforms such as the UK’s operational separation policy.
KW - Non-audit Services
KW - Auditor independence
KW - Qualified audit opinion
KW - Going-concern comments
KW - Economic bonding
KW - EU Audit Directive and Regulation
UR - https://www.open-access.bcu.ac.uk/17238/
M3 - Working paper
VL - 41
T3 - CAFE Working Paper
BT - A Tale of Two Outcomes: Non-audit Services and Auditor Independence After the EU Audit Directive and Regulation (EU ADR)
PB - Centre for Accountancy Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University
ER -