Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980
Nanyang Technological University (NTU) - Nanyang Business School
Columbia Business School
Harvard Business School
September 24, 2011
Review of Accounting Studies, Forthcoming
We provide evidence on the long standing concern on auditor conflicts of interest from providing non-audit services (NAS) to audit clients by using rarely explored NAS fee data from 1978-80. Using this earlier setting, we find cross-sectional evidence of improved earnings quality when auditors provide NAS, especially those related to information services. This is consistent with better audit quality from knowledge spillovers due to the joint offering of audit and consulting services. Events related to the repeal of these NAS disclosures in 1982 are associated with a small positive stock price reaction suggesting no adverse economic consequences of withdrawing NAS disclosures. Further, following the repeal of disclosure requirements we find no change in the earnings quality of client firms. In sum, data drawn from an earlier time period suggest that auditors’ reputational incentives, possible synergies and knowledge transfers imply that NAS offered by audit firms can be associated with improved audit and reporting quality in client firms.
Number of Pages in PDF File: 47
Keywords: auditor independence, audit fees, non audit services, auditing, conflict of interests, financial reporting, earnings management
JEL Classification: K22, G18, G28, G34, M40, M41, M49
Date posted: September 26, 2011
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