Audit and Non-Audit Fees and Capital Market Perceptions of Auditor Independence

28 Pages Posted: 2 Nov 2004 Last revised: 17 Mar 2015

See all articles by Al (Aloke) Ghosh

Al (Aloke) Ghosh

UNC Charlotte

Sanjay Kallapur

Indian School of Business

Doocheol Moon

SUNY at Old Westbury - School of Business

Date Written: August 1, 2004

Abstract

This study investigates investor perceptions, proxied by earnings response coefficients (ERCs), of auditor independence-in-appearance as a function of audit and non-audit fees. For a sample of 8,940 firm-years over the 2000-2002 period, we find in separate regressions that ERCs are negatively associated with the ratio of non-audit to total fees (non-audit fee ratio) and with client importance (auditors' fees from a given client divided by auditor's total revenues). When we include both in the same regression, however, only client importance remains significantly associated with ERCs. Thus our results contradict the commonly-held belief (SEC 1978, 1979, Earnscliffe Research and Communications, 1999) that perceived auditor independence is a function of the non-audit fee ratio. We also fail to find a statistically significant change in ERCs when non-audit fees increase or decrease by at least 30 percent between successive years; this result fails to support the conjecture (Coffee 2004) that investors interpret non-audit fee changes as "bribes or punishments" by clients.

Keywords: Auditor independence-in-appearance, client importance, non-audit services

JEL Classification: M41, M49, G12, G29

Suggested Citation

Ghosh, Al (Aloke) and Kallapur, Sanjay and Moon, Doocheol, Audit and Non-Audit Fees and Capital Market Perceptions of Auditor Independence (August 1, 2004). Journal of Accounting and Public Policy, Vol. 28, No. 5, 2005, Available at SSRN: https://ssrn.com/abstract=612481 or http://dx.doi.org/10.2139/ssrn.612481

Al (Aloke) Ghosh (Contact Author)

UNC Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

HOME PAGE: http://www.alokeghosh.com

Sanjay Kallapur

Indian School of Business ( email )

ISB Campus, Gachibowli
Hyderabad, 500 032
India
+91 40 2318 7138 (Phone)

Doocheol Moon

SUNY at Old Westbury - School of Business ( email )

Old Westbury, NY 11568-0210
United States

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