Non-Audit Services, Auditor Quality and the Value Relevance of Earnings
Ferdinand A. Gul
Monash University Sunway Campus
Judy S.L. Tsui
Hong Kong Polytechnic University - School of Accounting and Finance
Dan S. Dhaliwal
University of Arizona - Department of Accounting
Accounting and Finance, Vol. 46, No. 5, pp. 797-817, December 2006
This paper tests the hypothesis that there is an inverse relation between non-audit services (NAS) provided by a firm auditor and the value relevance of earnings (measured as the earnings response coefficient) and that this relation is weaker for firms with Big 6 auditors. The hypothesis is based on anecdotal evidence and previous research that suggests that the provision of NAS by the external auditor is likely to adversely affect investors' perceptions of the credibility of financial reports, and that Big 6 auditors, because of reputational capital and litigation costs, are likely to mitigate the adverse effects of NAS. Results using 840 firm-year observations of Australian companies document a statistically significant inverse relationship between NAS and the value relevance of earnings, and this inverse relationship is weaker for Big 6 auditors, therefore supporting the hypothesis.
Number of Pages in PDF File: 21Accepted Paper Series
Date posted: November 17, 2006
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