Non-audit services in private firms: does board composition influence nas purchase?

Abstract

This thesis explores the intricate relationship between corporate governance structures, particularly the composition of the board of directors, and external audit function. The primary focus is on how board size and independence influence non-audit fees within Belgian private firms. Through a rigorous analysis, this study aims to contribute to the understanding of how internal governance mechanisms interact with external audit practices, particularly in the context of stringent European Union regulations. Indeed, the recent Belgian adaptations of EU NAS restrictions extend the regulatory oversight beyond Public-Interest Entities to private firms. This broader applicability ensures that a higher portion of the audit market complies with strict independence safeguards. The study draws on agency theory to examine governance mechanisms mitigating conflicts between shareholders and managers. A comprehensive review of the board of directors as internal corporate governance mechanism highlights its role in monitoring management and ensuring the integrity of financial reporting. The external audit function is emphasized as a critical external mechanism for reducing information asymmetry and maintaining trust in financial statements. The thesis identifies the potential threats to audit quality, including conflicts of interest arising from NAS provision. The study’s key findings indicate that independent boards are associated with lower likelihoods and smaller amounts of NAS purchases, demonstrating that governance practices aimed at maintaining auditor independence are effective. This supports regulatory efforts to limit conflicts of interest, particularly for firms with higher board independence, and indicates that independent boards, with their advisory role, may be better equipped to guide firms toward alternative solutions for NAS needs, thereby reducing dependence on auditors for such services. In contrast, the relationship between board size and non-audit fees was found to be non-significant. This indicates that board size does not substantially influence the demand for non-audit services within the sampled firms. Furthermore, this study reveals that firm size, complexity, and industry-specific factors play a significant role in shaping non-audit service (NAS) spending patterns. Larger firms and those with complex structures, including both subsidiaries and establishment units, demonstrate higher NAS engagement, driven by their need for a broader range of advisory services. Similarly, firms audited by Big 4 auditors allocate a higher proportion of their fees to NAS, likely due to the comprehensive service offerings and perceived expertise in non-audit work. Sectoral variations also emerge, which suggests that certain industries may be subject to stronger regulatory controls or lower demand for advisory services showing reduced NAS spending, while others with fewer restrictions or more intricate operations may exhibit a greater reliance on NAS. In conclusion, this study underscores the pivotal role of board independence, firm complexity, and industry dynamics in shaping NAS spending patterns. It highlights the need for tailored governance and regulatory strategies to address these factors effectively, ensuring that both corporate governance and external audit practices support financial integrity and independence within the Belgian market.