Auditor Independence and Fair Value Accounting: An Examination of Non-Audit Fees and Goodwill Impairments

Posted: 24 Jun 2019

See all articles by Joseph V. Carcello

Joseph V. Carcello

University of Tennessee

Terry L. Neal

University of Tennessee

Lauren C. Reid

Wake Forest University - Schools of Business

Jonathan E. Shipman

University of Arkansas

Multiple version iconThere are 2 versions of this paper

Date Written: March 12, 2019

Abstract

Inadequate testing of fair value accounting estimates, including goodwill, is often cited as an audit deficiency in PCAOB inspection reports, and, in some cases, these deficiencies have led to enforcement actions against the auditor. As a result of these issues, the PCAOB recently proposed a new auditing standard for fair value accounting. While these regulatory actions suggest that auditors are challenged by the fair value regime of accounting for goodwill, they also highlight an area where the auditor could be influenced by their financial ties to a client. In this study, we test whether non-audit fees are associated with goodwill impairment decision outcomes. Our results indicate that the non-audit fees a client pays are inversely related to the likelihood of impairment in settings where goodwill is likely to be impaired. Additional examinations suggest that the negative relation between non-audit fees and auditor independence is driven by clients who are most incentivized to exert their influence over the auditor.

Keywords: goodwill impairments, fair value estimates, auditor independence, non-audit service fees

Suggested Citation

Carcello, Joseph V. and Neal, Terry L. and Reid, Lauren C. and Shipman, Jonathan E., Auditor Independence and Fair Value Accounting: An Examination of Non-Audit Fees and Goodwill Impairments (March 12, 2019). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3406037

Joseph V. Carcello

University of Tennessee ( email )

Department of Accounting & Information Management
629 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-1757 (Phone)
865-974-4631 (Fax)

Terry L. Neal (Contact Author)

University of Tennessee ( email )

639 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-2664 (Phone)
865-974-4631 (Fax)

Lauren C. Reid

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

Jonathan E. Shipman

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

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