Agency conflicts and the demand for non‐audit services

Purpose - The aim of the present paper is to examine the impact of agency costs on the demand for non‐audit services (NAS) in Germany. Design/methodology/approach - This study uses data from German listed companies to test whether audit clients vary their purchases of NAS according to agency costs over time. The paper used multiple regressions and included ownership composition, performance‐based management compensation, and leverage as proxies for agency conflicts. Findings - Overall, the hypothesis that agency costs influence the demand for NAS was not confirmed. None of our proxies for agency conflicts were significantly associated with the purchase of NAS. These findings remain stable when alternative NAS fee measures were applied. Research limitations/implications - Findings cannot be generalised for smaller, private companies. Particularities of the German setting might have caused the insignificance of agency costs, but this cannot be tested statistically. The contrast between these insignificant results and the significant impact of agency costs on the demand for non‐audit services revealed by many previous studies, in particular from the US and the UK, raises important questions for future research. Practical implications - This paper concerns management's perceptions on how stakeholders perceive the effect of NAS provision on auditor independence. Thus, its findings should be of interest to German, European and international regulators when evaluating the impact of the provision of NAS on independence in appearance. Originality/value - This study is the first to provide evidence on the relationship between agency conflicts and the demand for non‐audit services from Germany and thus from a continental European country. Moreover, it provides evidence for periods after the introduction of stricter standards on the provision of non‐audit services. In addition, it applies a new proxy for agency costs (i.e. performance‐based management compensation).