Auditor Independence: Evidence on the Joint Effects of Auditor Tenure and Non-Audit Fees
Ferdinand A. Gul
Monash University Sunway Campus
Rutgers, The State University of New Jersey - Accounting & Information Systems
Gopal V. Krishnan
American University; American University - Kogod School of Business
Auditing: A Journal of Practice & Theory, 2007
This study examines whether the impact of non-audit fees on auditor independence is contingent on auditor tenure. The results, based on a sample of 4,720 U.S. firms for the years 2000 and 2001, show that there is a positive association between non-audit fees and positive discretionary current accruals, a proxy for auditor independence, for firms with short auditor tenure of not more than three years. These findings suggest that non-audit fees may impair auditor independence when auditor tenure is short and not when auditor tenure is long. Furthermore, exploratory analyses show that the positive association between non-audit fees and earnings management for firms with short auditor tenure is significant for small clients but not for large clients. Taken together, these results suggest that the association between non-audit fees and auditor independence is contingent upon auditor tenure, and that high non-audit fees have a negative impact on auditor independence when audit tenure is short and client firm size is small.
Number of Pages in PDF File: 43
Keywords: Auditor independence, non-audit fees, discretionary accruals, auditor tenure
JEL Classification: M49, G34, M41, M43Accepted Paper Series
Date posted: May 8, 2007
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