A Tale of Two Outcomes: Non-audit Services and Auditor Independence After the EU Audit Directive and Regulation (EU ADR)

Mark Holmes

No 41, CAFE Working Papers from Centre for Accountancy, Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University

Abstract: 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.

Date: 2026-03-31
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