Non‐Audit Fees and Auditor Independence: New Evidence Based on Going Concern Opinions for U.S. Companies Under Stress
Paul A. Griffin
University of California, Davis - Graduate School of Management; University of California, Davis
David H. Lont
University of Otago - Department of Accountancy and Finance
January 4, 2010
This paper reexamines the long-standing issue of whether the consulting fees earned by auditors affect their independence. The evidence in the United States is far from settled in this regard and continues to vex academics, professionals, and policy makers alike. Our model predicts a negative relation between auditor supplied non-audit fees and auditor independence. We test this model by examining auditors’ propensity to issue a going concern opinion for a sample of U.S. companies experiencing financial stress.
Using a grouping approach to reduce potential measurement error in the variables, we document a reliable negative relation between non-audit fees and our proxy for auditor independence, which is consistent with our theory. This new evidence, based on an alternative procedure, may explain why some previous studies on U.S. companies have failed to find a negative relation. We also find that SOX and associated influences on auditor independence, but not auditor tenure, may have moderated this negative relation.
Number of Pages in PDF File: 47
Keywords: Auditor independence, non-audit fees, fee ratio, going concern opinion, auditor
JEL Classification: C30, K22, L80, M41, M42
Date posted: January 6, 2010