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Non-Audit Services and Earnings Management in the Pre-SOX and Post-SOX Eras

37 Pages Posted: 18 May 2011 Last revised: 21 Apr 2014

Jayanthi Krishnan

Temple University - Department of Accounting

Lixin (Nancy) Su

Department of Accountancy, Lingnan University

Yinqi Zhang

American University

Date Written: August 5, 2010

Abstract

Concerns about the impact of auditor-provided non-audit services (NAS) on auditor independence arise because of (1) auditors’ economic dependence on their clients and (2) some specific types of NAS which the SEC argues can harm auditor objectivity. The SEC’s prohibition in 2003 of specific kinds of NAS led to a significant decline in NAS between 2000-2001 and 2004-2005. We argue that this decline in observed NAS fees can be used to identify firms that had a greater likelihood of impaired auditor independence in the pre-SOX period. Using discretionary accruals to proxy for earnings management, we find a positive association between discretionary accruals in the pre-SOX era and the subsequent reduction in NAS, but this was confined to income-decreasing accruals. Further, the association between downwards earnings management and the decline in NAS was reduced in the post-SOX era.

Keywords: Non-Audit Services, Earnings Management, Sarbanes-Oxley Act

JEL Classification: M41, M49, G12, L84

Suggested Citation

Krishnan, Jayanthi and Su, Lixin (Nancy) and Zhang, Yinqi, Non-Audit Services and Earnings Management in the Pre-SOX and Post-SOX Eras (August 5, 2010). Auditing: A Journal of Practice & Theory, Vol. 30, No. 3, 2011. Available at SSRN: https://ssrn.com/abstract=1677166 or http://dx.doi.org/10.2139/ssrn.1677166

Jayanthi Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-3085 (Phone)

Lixin (Nancy) Su

Department of Accountancy, Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Tuen Mun, New Territories
Hong Kong

Yinqi Zhang

American University ( email )

4400 Massachusetts Ave NW
Washington, DC 20016
United States

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