Non-Audit Services in Private Firms: the Effect of NAS on the Cost of Debt.

Abstract

Executive summary This thesis explores the impact of Non-Audit Services (NAS) on the cost of debt (COD) for Belgian private companies. Despite legislators in the European Union focusing their restrictions mainly on public-interest entities, private firms still heavily rely on external audits for credibility with creditors. By examining 567 Belgian private firms over the period 2016–2022, the study employs a firm fixed effects approach to isolate the influence of NAS on borrowing costs. The analysis considers both the total fees paid for NAS and their proportion relative to statutory audit fees, while also differentiating among various types of NAS (e.g., assurance, tax, miscellaneous). The results demonstrate that, on balance, NAS can decrease borrowing costs by enhancing creditors’ perceptions of financial reporting quality. Specifically, assurance and tax-related NAS appear to generate knowledge spillovers that improve the reliability of financial statements, which creditors reward with lower interest rates. However, when NAS fees become excessively high or their scope is unclear, concerns over compromised auditor independence arise, offsetting these benefits. Robustness checks indicate that the mitigating effect of NAS on borrowing costs is especially pronounced among financially distressed firms, suggesting a signaling mechanism at play in which NAS engagements convey a firm’s commitment to stronger financial oversight and transparency. Taken together, these findings highlight the dual role of NAS: they can meaningfully reduce the cost of debt if managed judiciously, but they also pose risks to auditor objectivity when fees or services extend too far. The implications underscore the importance of nuanced regulatory guidance—particularly in a private-firm context—and offer practical insights for managers looking to leverage NAS to improve financing terms without jeopardizing auditor independence. Word count: 13,420