Are Audit and Nonaudit Services Associated with the Delayed Recognition of Bad News?
Gopal V. Krishnan
This study examines whether the tendency of managers to delay recognition of bad news about future cash flows is associated with the level of audit and nonaudit services provided by the incumbent auditor. The findings, based on multiple proxies to capture timely recognition of bad news, consistently suggest that economic dependence caused by audit and nonaudit services does not lead to delayed recognition of bad news. There is evidence that earnings of high-total fee clients have become more timely in reporting bad news in year 2001 relative to 2000, perhaps in response to mitigate investor concerns about auditor independence arising from fee dependence.
Note: Previously titled "Are Nonaudit Services and Auditor Tenure Associated with the Delayed Recognition of Bad News?"
Keywords: independence, audit fees, asymmetric timeliness, big 5 firms, Conservatism, economic bonding
JEL Classification: M49, M41, M44
Date posted: October 12, 2003