GDL

This article searches for and defines efficient regulation of the provision of non-audit


services by auditors to their audit clients. From an examination of the particular


problems posed by these services it is concluded that they reduce total costs, increase


technical competence, and motivate more intense competition. Furthermore, they do


not necessarily damage auditor independence or the quality of non-audit services. This


assessment leads to recommending that legislative policy should aim at facilitating the


development and use of the safeguards provided by the free action of market forces.


Regulation should thus aim to enable the parties—audit firms, self-regulatory bodies,


and audit clients—to discover through competitive market interaction both the most


efficient mix of services and the corresponding quality safeguards, adjusting for the


costs and benefits of each possibility. Particular emphasis has been placed on the role


played by fee income diversification and the enhancement, through disclosure rules, of


market incentives to diversify. A rule of mandatory disclosure of client diversification is


examined to facilitate the task of the market with regard to achieving the optimal


degree of auditor independence.

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