47 Pages Posted: 15 Jul 2011 Last revised: 8 Aug 2011
Date Written: July 15, 2011
We provide evidence on the long standing concern on auditor conflicts of interest from providing non-audit services (NAS) to audit clients by using rarely explored NAS fee data from 1978-80 Using this earlier setting, we find cross-sectional evidence of improved earnings quality when auditors provide NAS, especially those related to information services. This is consistent with better audit quality from knowledge spillovers due to the joint offering of audit and consulting services. Events related to the repeal of these NAS disclosures in 1982 are associated with a small positive stock price reaction suggesting no adverse economic consequences of withdrawing NAS disclosures. Further, following the repeal of disclosure requirements we find no change in the earnings quality of client firms. In sum, data drawn from an earlier time period suggest that auditors’ reputational incentives, possible synergies and knowledge transfers imply that NAS offered by audit firms can be associated with improved audit and reporting quality in client firms.
Keywords: auditor independence, audit fees, Nonaudit services, Auditing, conflict of interests, financial reporting, earnings management
JEL Classification: K22, G18, G28, G34, M40, M41, M49
Suggested Citation: Suggested Citation
Koh, Kevin and Rajgopal, Shivaram and Srinivasan, Suraj, Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980 (July 15, 2011). Harvard Business School Research Paper No. 1886489. Available at SSRN: https://ssrn.com/abstract=1886489 or http://dx.doi.org/10.2139/ssrn.1886489
By Ray Ball