Introduction

This assignment address the empirical question of whether non-audit service fees (NAS)
influences audit independence and hence audit quality. It also question whether an audit
firm should be allowed to provide audit fees and NAS to the same client. The sale of non-
audit services by audit firm became a way for them to increase profit and growth
(Bloomfield and Shackman 2008). The degree and the number of NAS provided to audit
client in the US has dramatically growth(Securities and Exchange Commission (2000).
According to(Beattie 2002), the ratio of NAS fees received by auditors in the UK growth
from year 98% to 300% between year 1996 to 2002. The Big 4 auditors total revenues in
year 1998 has comprise 45% of NAS fees and also 50% of revenue were revenues from
consulting services (Levitt 2000).

Researchers, regulators, professionals and the community have paid substantial attention
to the issue of auditor independence and audit quality. Many accounting researchers
examined the NAS provided by auditors for several decades. The case of Enron scandal
and its audit firm Auther Aderson has become the initial wave of the studies during the last
decades. Anderson provided bot audit services and NAS for Enron. Aderson become biased
because its total fees generated from Enron form a substantial proportion of the fees in
which the audit fees is $25 million and $27 million for performing NAS has become
substantial fees(Beattie 2002). Anderson total fees received from Enron for the significant
year exceeding $50 million, leads to question about the economic dependence and conflict
of interest fees raised up. The following year, there is increased number of accounting
scandal found on other corporate due to the practice of providing bot audit services and
NAS to a same client such as WorldCom, Tyco, Freddie Mac and Imclobe System
Incorporation(Mazrah Malek and Saidatunur Fauzi Saidin 2013). It was reported that the
above corporation involved in the accounting scandal were received a large NAS from their
client(Md Shahidul Islam 2016). Audit quality is defined jointly with auditor’s
independence(Deangelo 1981). NAS will cause auditors’ independence and corresponding
poor audit quality(Md Shahidul Islam 2016). Thus, according to the presume by (Kinney,
Palmrose, and Scholz 2004),the provision of NAS will spoils auditors independence and
will lower the audiy quality.

In Malaysia, The Company Act 1965 required to disclose the audit services fees in a
company annual reports. PRG 7 (Recommended Practice Guide) by Malaysia Institute OF
Accountants (MIA) required only listed companies to disclose the NAS fees. MIA prohibits
auditors from providing bookkeeping services, staff lending and design, internal audit
services, provide or implement financial information technology services through its By-
Laws (Malaysian Institute of Accountants). Previous research found that listed companies
in Malaysia are likely to practice acquiring additional services from auditor (Mazrah Malek
and Saidatunur Fauzi Saidin 2013). According to (Mazrah Malek and Saidatunur Fauzi
Saidin 2013) cited from (M. Malek and A. Che Ahmad,2012), in 2002 the listed companies
acquiring additional services from its auditor is 63%, while in 2007 has reported 44 %.

Definition of Non-Audit Services (NAS)

When Audit firm provide more than audit service for their clients, these kind of services
are known as non-audit services. Non audit can be any service that not involving the audit
of a client’s financial statements . Non-audit services may be a threat for auditors

Examples include tax planning and preparation, business consulting or systems integration.

Audit firms can offer more than audit revision for their clients, these kinds of
services are so called non-audit services. The provision of such services may be a
threat for auditors’ independence that can increase the risk of conflicts for
statutory auditors and audit firms. As a consequence, the new audit framework
presents a black list of non-audit services that audit firms’ cannot provide to the
audited PIE, to its parent undertaking and to its controlled undertakings within
the Union (European Commission, 2014).
The main services in the black list include accounting and bookkeeping- and
taxation and legal services, corporate finance and business recovery and
business and management consultancy4 (European Parliament & the Council,
2014). It is however possible for Member States to refrain from the black list to
provide specific tax and valuation services, the criteria is that these must be
irrelevant and have no direct impact on the audited financial statements.
Member States can also prohibit more non-audit services than the ones
presented in the list (European Commission, 2014).