Auditors' Incentives and Audit Quality: Non-Audit Services versus Contingent Audit Fees

Figures & data

Figure 1. Timing of the model.

Figure 2. Reporting process at t = 1 and t = 3.

Table 1. Main notations and definitions.

Notation	Definition
Exogenous variables
p	Probability that firm i is good
q	Probability of success when firm i is good
R	Firm i's cash flow in case of success
I	Initial investment in firm i
τ	Extra probability of success of NAS
β	NAS rent earned by consultants
ρ	Litigation/reputation cost incurred by auditor i
c	Auditor i's cost of exerting high audit effort
$s_i\in \{\mathrm{\varnothing },s_B\}$	Auditor i's audit signal
Endogenous variables
$1-l_i$	Probability that audit committee i observes auditor i's signal
$F_i$	Noncontingent audit fees paid to auditor i
$F_{\mathrm{ci}}$	CAF paid to auditor i contingent on an unfavorable audit report
$e_i\in \{e_L,e_H\}$	Auditor i's audit effort
$r_i\in \{\mathrm{\varnothing },s_B\}$	Auditor i's audit report
$\overline{\beta }\in [0,\beta ]$	NAS restriction chosen by the regulator (Section 4 only)

Figure 3. $W_{\mathrm{investors}}$ (gray), $1-l_1^{\ast }$ (black) and $A{Q}^{\ast }$ (dashed) for $\overline{\beta }\in [0,\beta ]$.

Figure 4. $W_{\mathrm{investors}}$(gray), $1-l_1^{\ast }$(black) and $A{Q}^{\ast }$(dashed) for $\overline{\beta }\in [0,\beta ]$.