Non-Audit Services in Audit Committee Interlocked Firms, Financial Reporting Quality, and Future Performance

Journal of Accounting, Auditing & Finance, forthcoming

42 Pages Posted: 8 Jun 2020 Last revised: 11 Apr 2021

See all articles by Linna Shi

Linna Shi

University of Cincinnati - Lindner College of Business

Siew Hong Teoh

University of California, Irvine - Accounting Area

Jian Zhou

University of Hawaii at Manoa

Date Written: March 2, 2021

Abstract

We investigate whether board-interlocked firms via an audit committee (AC) board member exhibit correlated non-audit service (NAS) purchases, and whether financial reporting quality and future firm performance vary with the amount of correlated NAS purchases from the AC interlock. We find that AC-interlocked firms have positively correlated total NAS and three NAS sub-types – Tax, Assurance, and Other – in the overall sample period from 2000-2016, and in each of the sub-periods pre- and post-SOX. Firms with a larger NAS component that is explained by the AC interlock tend to exhibit lower financial reporting quality. We also find evidence that firms with higher AC-interlocked NAS purchases are associated with lower future performance, although this association exists only in the pre-SOX period. Overall, the evidence suggests that greater NAS purchases among AC interlocked firms can have a detrimental effect on financial reporting quality and auditor independence. While these detrimental effects are concentrated in the pre-SOX period when there were less restrictions on NAS purchases, we find some evidence that the association with lower financial reporting quality persists in the post-SOX period.

Keywords: Non-audit service, audit committee interlock, financial reporting quality, performance, auditor independence

JEL Classification: M41

Suggested Citation

Shi, Linna and Teoh, Siew Hong and Zhou, Jian, Non-Audit Services in Audit Committee Interlocked Firms, Financial Reporting Quality, and Future Performance (March 2, 2021). Journal of Accounting, Auditing & Finance, forthcoming, Available at SSRN: https://ssrn.com/abstract=3598492 or http://dx.doi.org/10.2139/ssrn.3598492

Linna Shi

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States
(513) 556-2097 (Phone)

Siew Hong Teoh (Contact Author)

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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