The Effects of Joint Provision and Disclosure of Non-Audit Services on Audit Committee Members' Decisions and Investors' Preferences

42 Pages Posted: 19 Jul 2004

See all articles by Lisa Milici Gaynor

Lisa Milici Gaynor

University of South Florida - School of Accountancy

Linda S. McDaniel

University of Kentucky - Von Allmen School of Accountancy

Terry L. Neal

University of Tennessee

Multiple version iconThere are 2 versions of this paper

Date Written: September 2005

Abstract

Recent corporate governance reforms that require audit committees to pre-approve audit and non-audit services increase audit committees' accountability to third parties for actual auditor independence and audit quality. Other SEC reforms mandate the disclosure of fees for auditor-provided services and are aimed at influencing investors' perceptions of auditor independence. These fee disclosures also reveal audit committees' pre-approval decisions, enhancing public accountability. Thus, audit committees may be less willing to hire auditors for non-audit services to avoid fee disclosures even when joint provision improves audit quality. One hundred experienced corporate directors, responding as audit committee members or investors, participated in an experiment in which we manipulated the effect of the auditor's provision of non-audit services on audit quality and the fee disclosure requirement. We find that audit committee members are more likely to recommend joint provision if audit quality improves, consistent with investors' preferences. However, unlike investors, committee members are more reluctant to recommend joint provision when public disclosures are required, even at the expense of audit quality. These findings offer evidence about an indirect effect of recent reforms.

Keywords: audit committees, non-audit services, disclosure, audit quality, auditor independence

JEL Classification: M41, M45, M49, G34

Suggested Citation

Gaynor, Lisa Milici and McDaniel, Linda S. and Neal, Terry L., The Effects of Joint Provision and Disclosure of Non-Audit Services on Audit Committee Members' Decisions and Investors' Preferences (September 2005). Available at SSRN: https://ssrn.com/abstract=564946 or http://dx.doi.org/10.2139/ssrn.564946

Lisa Milici Gaynor

University of South Florida - School of Accountancy ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

Linda S. McDaniel (Contact Author)

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Terry L. Neal

University of Tennessee ( email )

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

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