Do Non-audit Service Fees Impair Auditor Independence? Evidence from Going-concern Audit Opinions

USC Leventhal School of Accounting

41 Pages Posted: 22 Jan 2002  

Mark L. DeFond

University of Southern California - Leventhal School of Accounting

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

Date Written: January 2002

Abstract

We find no evidence that non-audit service fees impair auditor independence, where independence is surrogated by auditors' propensity to issue going concern audit opinions. We do find, however, that auditors are more likely to issue going concern opinions to clients paying higher audit fees, suggesting that auditors behave with relatively greater independence towards these clients. Our findings are consistent with Reynolds and Francis (2001) and suggest that market-based incentives, such as loss of reputation and litigation costs, dominate the benefits auditors are likely to receive from compromising their independence to retain clients that pay larger fees. Overall, our findings indicate that recent SEC regulations based on concerns that non-audit services impair auditor independence, are unfounded.

Keywords: Non-audit services; Audit fees; Audit markets

JEL Classification: M49

Suggested Citation

DeFond, Mark L. and Raghunandan, Kannan and Subramanyam, K.R., Do Non-audit Service Fees Impair Auditor Independence? Evidence from Going-concern Audit Opinions (January 2002). USC Leventhal School of Accounting. Available at SSRN: https://ssrn.com/abstract=297747 or http://dx.doi.org/10.2139/ssrn.297747

Mark DeFond (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

Kannan Raghunandan

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-2582 (Phone)

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

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