Does Auditor Independence Matter? Evidence from SEC Sanctions against PricewaterhouseCoopers LLP for Prohibited Non-Audit Services

50 Pages Posted: 2 Dec 2020

See all articles by Russell Barber

Russell Barber

University of Colorado Denver

Carol Callaway Dee

University of Colorado Denver

Katherine Gunny

University of Colorado at Denver

Date Written: October 14, 2020

Abstract

We examine stock market effects related to news of the Securities and Exchange Commission’s (SEC) sanctions against PricewaterhouseCoopers LLP (PWC) in 2019. PWC provided prohibited non-audit services (NAS) to audit clients and mischaracterized the nature of the services to the audit committees by telling audit committees the prohibited services were audit services when they were not. The sanctions against PWC provide a rare opportunity to explore whether investors believe that the provision of certain prohibited NAS to audit clients violates an audit firm’s independence, thus reducing investors’ confidence in the audited financial statements. Univariate and Schipper-Thompson (1983) results show that, overall, stock prices for PWC clients reacted significantly negatively to news of the SEC sanctions while prices for non-PWC clients did not. We also find that the reaction is more negative for PWC clients that have higher abnormal fees and smaller audit committees. The examination of earnings response coefficients provides evidence that investors in PWC clients value unexpected earnings less in the quarter after the disclosure of sanctions than in the quarter before suggesting a reduction in investor confidence related to the disclosure of independence violations by PWC.

Keywords: PCAOB, auditor independence, audit quality, non-audit service

Suggested Citation

Barber, Russell and Dee, Carol Callaway and Gunny, Katherine, Does Auditor Independence Matter? Evidence from SEC Sanctions against PricewaterhouseCoopers LLP for Prohibited Non-Audit Services (October 14, 2020). Available at SSRN: https://ssrn.com/abstract=3711803 or http://dx.doi.org/10.2139/ssrn.3711803

Russell Barber

University of Colorado Denver ( email )

United States

Carol Callaway Dee

University of Colorado Denver ( email )

1475 Lawrence St.
Campus Box 165, PO Box 173364
Denver, CO 80217-3364
United States

Katherine Gunny (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

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