Potential threats of audit firm independence: Evidence from Italy on audit quality

Purpose – This study aims to investigate the potential threats to the independence of an auditor who provides\r\nboth auditing and non-audit services (NAS), in terms of credibility of and confidence in audit quality.\r\nDesign/methodology/approach – In this study, we first replicate the results of Campa and Donnelly (2016)\r\nusing hand-collected publicly available data for a sample of 91 Italian manufacturing public companies audited\r\nby a Big 4 and non-Big 4 audit firm over a longer time horizon (2015˗2019) using the panel data approach, based on three interconnected regression models.\r\nFindings – Previous studies in this area did not find a unique interpretation of the association between auditor\r\nindependence and provision of NAS. Our findings reveal that auditor independence, as measured by the\r\nmagnitude of discretionary accruals, is compromised by the provision of NAS, especially when unexpected audit\r\nfees are lower than expected. Enhanced credibility can lead to greater confidence in audit value. This study’s\r\nresults should be of interest to European and U.S. legislators, to improve financial reporting quality.\r\nOriginality/value – In the wake of the global financial crisis and loss of confidence in the role of auditors, this\r\nstudy investigates the supposed threats, to aim to enhance the credibility of and confidence in audit quality,\r\nespecially in settings outside the Anglosphere. This study would contribute to the literature to support the more\r\nbinding approach for audit firms.