Earnings Quality and Perceived Auditor Independence: Irrelevance of Nonaudit Services Time Period

Abstract

Substantial growth in consulting services provided by auditors in 1990’s has been highlighted as a threat to auditor independence, which has been argued to be the cause of changes in investors’ perception of auditor independence. Research based on audit and nonaudit fees disclosed in 2000’s provide consistent results. This study proposes that the perceived auditor independence decreased with increase in auditor provided nonaudit services even before recent controversial environmental changes. Based on nonaudit fees from 1978-80, the evidence indicates that smaller earnings response coefficients are associated with higher auditor provided nonaudit services. These results suggest impairment of auditor independence by the provisions of nonaudit services irrespective of the time period.

Keywords: Auditor Independence, Nonaudit Services, Consulting Services, Earnings Response Coefficients, ERC