The Association between Non-Audit Service Purchases and Managers' Compensation Structure

City University of Hong Kong

24 Pages Posted: 13 Feb 2002

See all articles by Charles J.P. Chen

Charles J.P. Chen

City University of Hong Kong (CityU) - Department of Accountancy

Gopal V. Krishnan

Bentley University

Xijia Su

City University of Hong Kong (CityU) - Department of Accountancy

Date Written: January 2002

Abstract

The rise of fees paid to incumbent auditors for non-audit services (NAS) relative to audit fees has been actively debated by the Securities and Exchange Commission, the accounting profession, investors, and others. Despite the negative publicity generated by NAS purchases, why do managers continue to purchase increasing quantities of NAS? We contribute to this debate by identifying an important determinant of NAS purchase decisions - the way top managers are compensated. By examining non-audit fees data and compensation data compiled from proxy statements, we find a positive association between NAS purchases and the proportion of performance-based compensation paid to the top five executives. Our findings are consistent with NAS purchases favorably impacting firm performance and consequently enhancing managers' compensation.

Keywords: Non-audit services; Compensation; Audit fees; Performance; Investment opportunities

JEL Classification: M41, M49, J33, G14

Suggested Citation

Chen, Charles Jieping and Krishnan, Gopal and Su, Xijia, The Association between Non-Audit Service Purchases and Managers' Compensation Structure (January 2002). City University of Hong Kong, Available at SSRN: https://ssrn.com/abstract=299487 or http://dx.doi.org/10.2139/ssrn.299487

Charles Jieping Chen (Contact Author)

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China
+852 2788-7909 (Phone)
+852 2788-7944 (Fax)

Gopal Krishnan

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

Xijia Su

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China
+852 2788 7995 (Phone)
+852 2788 7944 (Fax)

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