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Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980

Kevin Koh

Nanyang Technological University (NTU) - Nanyang Business School

Shivaram Rajgopal

Columbia Business School

Suraj Srinivasan

Harvard Business School

September 24, 2011

Review of Accounting Studies, Forthcoming

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.

Number of Pages in PDF File: 47

Keywords: auditor independence, audit fees, non audit services, auditing, conflict of interests, financial reporting, earnings management

JEL Classification: K22, G18, G28, G34, M40, M41, M49

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Date posted: September 26, 2011  

Suggested Citation

Koh, Kevin and Rajgopal, Shivaram and Srinivasan, Suraj, Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980 (September 24, 2011). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1933184

Contact Information

Kevin Koh
Nanyang Technological University (NTU) - Nanyang Business School ( email )
S3-B2C-96, Nanyang Avenue
Nanyang Business School , NTU
Singapore, 639798
(+65) 6790 4096 (Phone)
Shivaram Rajgopal
Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States

Suraj Srinivasan (Contact Author)
Harvard Business School ( email )
Soldiers Field
Boston, MA 02163
United States
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=pub&facId=10700
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