Do Accounting Firm Consulting Revenues Affect Audit Quality? Evidence from the Pre- and Post-SOX Eras

50 Pages Posted: 29 Jun 2014 Last revised: 6 Dec 2017

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Robert J. Pawlewicz

George Mason University - Department of Accounting

Timothy A. Seidel

Brigham Young University

Date Written: November 2017

Abstract

In recent years, public accounting firms have experienced a steady increase in the proportion of their revenues generated from consulting services. Although growth in consulting revenue following the Sarbanes-Oxley Act (SOX) has been generated primarily from services provided to nonaudit clients, regulators have expressed concerns about the potential implications of this increase for audit quality. In contrast, accounting firms assert that the expertise developed by their consulting professionals helps them to provide better quality audits. We examine the relation between the proportion of accounting firm consulting revenue to total revenue and audit quality and investor perceptions of audit quality. Because SOX drastically altered the source of consulting revenues for public accounting firms, we also separately examine these relations in the pre- and post-SOX eras. We find evidence suggesting that before SOX, higher proportions of audit firm consulting revenues negatively impacted both audit quality and investor perceptions of audit quality. However, we do not find a statistically significant association between audit firm consulting revenues and either audit quality or investor perceptions of audit quality following SOX. Our analyses suggest that even if these relations exist following SOX, the potential economic magnitude of the effect is small.

Keywords: accounting firms, audit quality, consulting services, nonaudit services

JEL Classification: M41, M42

Suggested Citation

Lisic, Ling Lei and Myers, Linda A. and Pawlewicz, Robert J. and Seidel, Timothy A., Do Accounting Firm Consulting Revenues Affect Audit Quality? Evidence from the Pre- and Post-SOX Eras (November 2017). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2460102 or http://dx.doi.org/10.2139/ssrn.2460102

Ling Lei Lisic

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Robert J. Pawlewicz

George Mason University - Department of Accounting ( email )

Fairfax, VA
United States

Timothy A. Seidel

Brigham Young University ( email )

Provo, UT 84602
United States

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