Non-Audit Services and Bias and Accuracy of Voluntary Earnings Forecasts Reviewed by Incumbent CPAs

16 Pages Posted: 8 Jul 2007

See all articles by Chen‐Lung Chin

Chen‐Lung Chin

National Chengchi University

Shou-Min Tsao

National Taiwan University

Hsin-Yi Chi

National Chung Hsing University - Department of Accounting

Abstract

This paper examines the association between the quality of voluntary earnings forecasts, as measured by forecast bias and accuracy reviewed by an incumbent CPAs, and the purchase of non-audit services (NAS) from the incumbent auditor. In the context of this study, we focus primarily on the Taiwanese market. Unlike in the UK and US, management forecasts must be reviewed by the incumbent CPA in Taiwan. Besides, enforcement of rules with regard to the provision of review-level assurance for management earnings forecasts tends to be less stringent than one of audit-level assurance for financial reporting. Using panel data of audit and non-audit fees available for Taiwanese firms, we find that firms with a high ratio of NAS tend to issue more optimistically biased and inaccurate forecasts under a lower auditor liability regime. These results provide some support for concerns expressed about the potential impact of unusually high levels of NAS on auditor independence and ultimately, the quality of audited financial reports. The findings also suggest that examining the auditor, and in particular, the provision of non-audit services, in isolation of an institutional environment provides an incomplete analysis of financial reporting.

Suggested Citation

Chin, Chen Lung and Tsao, Shou-Min and Chi, Hsin-Yi, Non-Audit Services and Bias and Accuracy of Voluntary Earnings Forecasts Reviewed by Incumbent CPAs. Corporate Governance: An International Review, Vol. 15, No. 4, pp. 661-676, July 2007. Available at SSRN: https://ssrn.com/abstract=998143 or http://dx.doi.org/10.1111/j.1467-8683.2007.00595.x

Chen Lung Chin (Contact Author)

National Chengchi University ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

Shou-Min Tsao

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

HOME PAGE: http://www.ce.ntu.edu.tw/eng/people/faculty/tra/smtsao.htm

Hsin-Yi Chi

National Chung Hsing University - Department of Accounting ( email )

No. 250, Kuo Kuang Rd. Taichung city, Taiwan
Taichung, Taiwan, 402
Taiwan
886-422859730 (Phone)
886-422196131 (Fax)

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