The Demand for Non-Audit Services and Auditor-Client Relationships: Evidence from Swedish Small and Medium-Sized Enterprises

The joint provision of audit and non-audit services by incumbent auditors has been intensively debated in the literature. The basic issue is that, while non-audit services can impair auditor independence, knowledge spillovers from these services can reduce the audit cost. This is an important trade-off for small and medium-sized enterprises (SMEs) that depend on their auditors for non-audit services. Using data from 322 Swedish SMEs, this study investigates the choice of purchasing non-audit services from the incumbent auditor and other audit firms. We hypothesize, and find, that the length of the auditor-client relationship is positively related to the purchase of non-audit services from incumbent auditors. Also, we find a positive association between perceived quality of audit services and the likelihood of a client purchasing non-audit services from the auditor. However, unlike studies of publicly traded companies, agency variables do not drive the purchase of non-audit services by SMEs.