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

58 Pages Posted: 8 Jun 2020

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: May 11, 2020

Abstract

We investigate whether non-audit service (NAS) purchases are correlated among audit committee (AC) interlocked firms. We then examine whether financial reporting quality and future firm performance vary with the amount of correlated NAS purchases from the AC interlock. We find that firms in the AC interlock have positively correlated NAS for total NAS and three NAS sub-types – Tax, Assurance, and Other – in the overall sample period from 2000-2016, and in the pre-SOX and post-SOX sub-periods. Firms with a larger AC interlocked-NAS component have higher non-reliance restatements, fraud F-score, likelihood of meeting or beating analyst forecasts, and absolute discretionary accruals, lower incidence of internal control material weakness reporting by the auditor, consistent with lower financial reporting quality for such firm. Higher AC-interlocked NAS firms also have lower cumulative ROA in the future three years. Overall, the evidence suggests that AC interlocks encourage NAS contagion, and are associated with poorer financial reporting and poorer future performance. Thus, on net, the evidence is inconsistent with NAS in AC networks providing positive knowledge spillovers to benefit audit quality or firm performance, and instead, is consistent with interlocked-NAS impairing auditor independence.

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 (May 11, 2020). 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
19
Abstract Views
113
PlumX Metrics