Disclosure of non-audit services in annual reports and auditor independence: Evidence from Italy

This article explores recent regulatory reforms in Italy and analyzes the fi rst-time application of mandatory disclosure in annual reports of audit and non-audit fees. This information can convey to readers of fi nancial statements an indication of auditor independence (in appearance). An empirical analysis is conducted on annual reports of 239 Italian listed companies for the year 2007. The main research objectives are as follows: (1) to provide a comprehensive description of the relative level of non-audit fees; and (2) to investigate the relation between non-audit services (NAS) and the opinion expressed in the audit report. The evidence shows that the average ratio of non-audit fees (further assurance services, tax advisory services and other services) to total auditor remuneration is 0.24. In particular, there are 38 companies (15.9 per cent) that paid their auditor more for NAS than for audit services; excluding further assurance services, there are 22 cases (9.2 per cent) with a ratio of non-audit fees that is higher than 0.50. In our sample, we observed 231 unqualifi ed opinions (96.7 per cent) and eight qualifi ed opinions (3.3 per cent): a statistical signifi cant relationship between the NAS ratio and qualifi ed opinions was not found. However, the study ’ s results show that there is a positive association between the emphasis of matter paragraph in the audit report and NAS. This fi nding cannot be interpreted as an indication of compromised auditor independence, thus opening space for further empirical studies on the use of emphasis of matter paragraphs in auditor reports. International Journal of Disclosure and Governance (2011) 8, 16–30. doi: 10.1057/jdg.2010.17; published online 2 September 2010