Does the Provision of Non-Audit Services Affect Investor Perceptions of Auditor Independence?

Posted: 19 Jul 2005

See all articles by Jayanthi Krishnan

Jayanthi Krishnan

Temple University - Department of Accounting

Yinqi Zhang

American University

Heibatollah Sami

Lehigh University


A number of recent studies examine whether the joint provision of audit and non-audit services (NAS) impairs auditor independence, and yield mixed results. We examine whether investors perceive auditor independence as being impaired when auditors supply non-audit services, by investigating the association between fee-based measures of non-audit service purchases and the earnings response coefficient (ERC).

We find that the non-audit fee-ratio and the level of non-audit fees were negatively associated with ERCs in 2001. When we use unexpected fees (a measure of over- or under-payment of nonaudit fees), we find a negative association between NAS purchases and ERC, but this occurs mainly in the second and third quarters following the release of the proxy. Further investigation reveals that the quarterly differences may be driven by the increasing flow of information (i.e., the first-time disclosures of fees and media analyses of these disclosures) that became available to investors during our sample period. We speculate that, during the course of the year 2001, the increase in information allowed investors to engage in better comparative analyses of the fee disclosures. We interpret our results as indicating that investors did perceive NAS as impairing auditor independence.

Keywords: Non-Audit services, Auditor Independence, Earnings Response Coefficients

JEL Classification: M41, M49, G12

Suggested Citation

Krishnan, Jayanthi and Zhang, Yinqi and Sami, Heibatollah, Does the Provision of Non-Audit Services Affect Investor Perceptions of Auditor Independence?. Auditing: A Journal of Practice & Theory, November 2005 , Available at SSRN:

Jayanthi Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-3085 (Phone)

Yinqi Zhang

American University ( email )

4400 Massachusetts Ave NW
Washington, DC 20016
United States

Heibatollah Sami

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3407 (Phone)

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