Auditor Independence: Evidence on the Joint Effects of Auditor Tenure and Non-Audit Fees

43 Pages Posted: 8 May 2007

See all articles by Ferdinand A. Gul

Ferdinand A. Gul

Monash University Sunway Campus

Bikki Jaggi

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Gopal V. Krishnan

Bentley University

Abstract

This study examines whether the impact of non-audit fees on auditor independence is contingent on auditor tenure. The results, based on a sample of 4,720 U.S. firms for the years 2000 and 2001, show that there is a positive association between non-audit fees and positive discretionary current accruals, a proxy for auditor independence, for firms with short auditor tenure of not more than three years. These findings suggest that non-audit fees may impair auditor independence when auditor tenure is short and not when auditor tenure is long. Furthermore, exploratory analyses show that the positive association between non-audit fees and earnings management for firms with short auditor tenure is significant for small clients but not for large clients. Taken together, these results suggest that the association between non-audit fees and auditor independence is contingent upon auditor tenure, and that high non-audit fees have a negative impact on auditor independence when audit tenure is short and client firm size is small.

Keywords: Auditor independence, non-audit fees, discretionary accruals, auditor tenure

JEL Classification: M49, G34, M41, M43

Suggested Citation

Gul, Ferdinand A. and Jaggi, Bikki and Krishnan, Gopal, Auditor Independence: Evidence on the Joint Effects of Auditor Tenure and Non-Audit Fees. Auditing: A Journal of Practice & Theory, 2007, Available at SSRN: https://ssrn.com/abstract=984656

Ferdinand A. Gul (Contact Author)

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

Bikki Jaggi

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

100B Rockafeller Road
Piscataway, NJ 08854
United States

Gopal Krishnan

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

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