37 Pages Posted: 18 May 2011 Last revised: 21 Apr 2014
Date Written: August 5, 2010
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: 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