Earnings Quality and Auditor Independence: An Examination Using Non-Audit Fee Data

Abstract

The SEC and capital market participants are concerned that the increasing amounts of fees companies pay to their auditors for non-audit services may give auditors economic incentives to compromise their independence, resulting in lower quality audits and, thus, lower quality earnings.

Using recent proxy statement disclosures of audit and non-audit fees, and controlling for variables known to be related to earnings management, we find that client firms paying high proportions of non-audit fees have income-increasing discretionary and total accruals. This suggests that auditors may be less diligent in curbing income-increasing earnings management for client firms from which they receive high proportions of non-audit fees.Our results are robust to alternative specifications of accrual models, surrogate measures of high non-audit fees, and the inclusion of additional explanatory variables.

Keywords: earnings quality, audit fees, non-audit fees, discretionary accruals, earnings management, auditor independence

JEL Classification: M41, M43, M49