Non-Audit Services and Earnings Conservatism: Is Auditor Independence Impaired?

40 Pages Posted: 14 Mar 2002

See all articles by Caitlin M. S. Ruddock

Caitlin M. S. Ruddock

UNSW Australia Business School, School of Accounting

Sarah J. Taylor

University of Melbourne - Faculty of Business and Economics

Stephen L. Taylor

University of Technology Sydney (UTS) - School of Accounting; University of Technology Sydney; Centre for International Finance and Regulation (CIFR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2004

Abstract

We examine whether the provision of non-audit services (NAS) by incumbent auditors is associated with a reduction in the extent of "news-based" earnings conservatism (i.e., the differential extent to which earnings reflect bad news on a timely basis). Reduced earnings conservatism is expected to occur if relatively high levels of NAS results in reduced auditor independence. Because the demand for NAS and the extent of earnings conservatism are potentially endogenous, our primary tests focus on the extent to which NAS purchases (relative to audit fees) are greater or less than expected. Using several different methods for identifying earnings conservatism, we consistently find that higher than expected levels of NAS are not associated with reduced conservatism. This result is also robust across alternative measures of the economic bond between auditors and their clients, and also holds for tests confined to either the Big 6 or non-Big 6 audit firms. Our results are consistent with factors such as market-based incentives, the threat of ligation and alternative governance mechanisms offsetting any expected benefits to the audit firm from reducing its independence. We therefore conclude that recent legislative intervention aimed at restricting the supply of NAS is unlikely to result in increased independence in fact, although independence in appearance may be improved.

Keywords: Non audit services, auditor independence, conservatism, audit quality

JEL Classification: M00, G29, M41, M49

Suggested Citation

Ruddock, Caitlin M. S. and Taylor, Sarah J. and Taylor, Stephen L., Non-Audit Services and Earnings Conservatism: Is Auditor Independence Impaired? (April 2004). Available at SSRN: https://ssrn.com/abstract=303343

Caitlin M. S. Ruddock

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia
+612 9385 5806 (Phone)
+612 9385 5925 (Fax)

Sarah J. Taylor

University of Melbourne - Faculty of Business and Economics ( email )

Victoria, 3010
Australia
+61383443414 (Phone)
+61393492397 (Fax)

Stephen L. Taylor (Contact Author)

University of Technology Sydney (UTS) - School of Accounting

P.O. Box 123
Broadway NSW 2007
Australia
+612 9514 3437 (Phone)

University of Technology Sydney ( email )

UTS Business School
PO Box 123 Broadway
Sydney, NSW 2007
Australia
61295143437 (Phone)
61295143513 (Fax)

Centre for International Finance and Regulation (CIFR) ( email )

Level 7 UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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