Nonaudit Services and Independence in Appearance: Decision Context Matters

2011 ◽  
Vol 23 (2) ◽  
pp. 51-67 ◽  
Author(s):  
Bryan K. Church ◽  
Ping Zhang
Keyword(s):  
Auditor Independence ◽  
Decision Context ◽  
Accounting Scandals ◽  
Asset Value ◽  
Nonaudit Services ◽  
Daunting Challenge ◽  
Independence In Appearance ◽  
Large Decline

ABSTRACT This paper reports the results of two experiments designed to examine users' assessment of the provision of nonaudit services (NAS) on auditor independence. By design, each experiment includes a different decision context. In the first experiment, users witness a large decline in asset value and decide whether to sue the auditor in an effort to recoup losses (as often occurs with accounting scandals). In the second experiment, users assess asset value, which offers a more mundane context. We contend that decision context influences users' motives, such that the auditor's provision of NAS is interpreted opportunistically. Indeed, we find that decision context dramatically affects users' perceptions. Our findings have implications for regulators, who face the daunting challenge of mandating rules/laws to ensure auditor independence. The task becomes more difficult when users' assessment of auditor independence is malleable, varying across decision contexts.

Nonaudit Fees, Auditor Independence, and Bond Ratings

2004 ◽  
Vol 23 (2) ◽  
pp. 89-103 ◽  
Author(s):  
Duane M. Brandon ◽  
Aaron D. Crabtree ◽  
John J. Maher
Keyword(s):  
Classification Accuracy ◽  
Economic Effect ◽  
Auditor Independence ◽  
Bond Market ◽  
Bond Ratings ◽  
Bond Rating ◽  
External Auditors ◽  
The Public ◽  
Accounting Scandals ◽  
Nonaudit Services

Recent accounting scandals and perceived audit failures have resulted in excessive criticism of the accounting and auditing professions. The financial press has expressed disdain at the presumably substandard work that was completed on audit clients, ostensibly at the expense of the public good. Our research investigates one aspect of this situation by exploring the effects that nonaudit services performed by a firm's external auditors have on perceived auditor independence in the bond market. Specifically, we analyze the effects that the magnitude and relative degree of nonaudit services have on the bond rating process. Regression results indicate that the amount of nonaudit services provided by a firm's external auditors is negatively associated with that client's bond rating. However, results of classification accuracy analyses fail to demonstrate any improvement in performance as a consequence of adding nonaudit fees to a benchmark prediction model, indicating no economic effect on the actual bond ratings. These results afford insights concerning bond rating analysts' perceptions of auditor independence and provide empirical evidence regarding the role that audit and nonaudit service fees play in establishing a firm's bond rating.

Do Investors' Perceptions Vary with Types of Nonaudit Fees? Evidence from Auditor Ratification Voting

2005 ◽  
Vol 24 (2) ◽  
pp. 9-25 ◽  
Author(s):  
Suchismita Mishra ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Empirical Support ◽  
Positive Association ◽  
Auditor Independence ◽  
The Other ◽  
Audit Committees ◽  
Single Measure ◽  
Nonaudit Services ◽  
Recent Initiative

In FRR No. 68, the SEC (2003b) updated the rules related to the disclosure of fees paid to the independent auditor by requiring more detailed information about nonaudit fees. The SEC (2002, 2003b) asserted that the partition of nonaudit fees into the categories of audit-related, tax, and other fees would be useful for investors in assessing the auditor's independence and in voting on ratifying the auditor. The SEC suggested that investors would view audit-related and tax services more favorably than “other” nonaudit services. In this paper we test the SEC's assertions by examining shareholder ratification votes, during 2003, at 248 of the S&P 1500 firms. Our results support the SEC's assertion that investors would view audit-related fees differently than the other two types of nonaudit fees. However, contrary to the SEC's assertion, both the tax fee ratio and the other fee ratio have a positive association with the proportion of votes against auditor ratification. The results related to tax fees provide empirical support to the PCAOB's recent initiative to examine the association between tax services and auditor independence. Our results can be useful for client managements and audit committees considering purchases of nonaudit services from auditors. Our findings also suggest that it may be useful to replicate some prior studies (that use a single measure of nonaudit fees) using the newer, more finely partitioned, fee data.

The Philosophy and Rhetoric of Auditor Independence Concepts

2004 ◽  
Vol 14 (3) ◽  
pp. 355-376 ◽  
Author(s):  
Sara Ann Reiter ◽  
Paul F. Williams
Keyword(s):  
Collective Responsibility ◽  
Auditor Independence ◽  
Early Years ◽  
Moral Foundation ◽  
Corporate Scandals ◽  
Economic Man ◽  
Accounting Scandals ◽  
Relational Concepts ◽  
American Society

Abstract:This paper analyzes the rhetoric surrounding the profession’s presentations of auditor independence. We trace the evolution of the character of the auditor from Professional Man in the early years of the twentieth century to the more public and abstract figures of Judicial Man and Economic Man. The changing character of the auditor in the profession’s narratives of legitimation reflects changes in the role of auditing, in the economic environment, and in the values of American society. Economic man is a self-interested and shallow character who offered the auditing profession little protection against involvement in corporate scandals. In the wake of recent accounting scandals, the profession is calling for a return to the character of Professional Man to restore trust in audits and the financial markets.We also analyze the philosophical bases of the metaphors surrounding auditor independence. These metaphors, particularly the metaphor of independence as separation, create problems in conceptualizing independence concepts. How can you discuss appropriate relationships when your basic concept is one of separation, or no relationship? On the other hand, relational concepts of independence are also flawed if they are not based on a firm moral foundation. We suggest how the profession can act to rebuild its moral foundation through recognition of collective responsibility.

Nonaudit Services and Earnings Conservatism: Is Auditor Independence Impaired?

2006 ◽  
Vol 23 (3) ◽  
pp. 701-746 ◽  
Author(s):  
CAITLIN RUDDOCK ◽  
SARAH J. TAYLOR ◽  
STEPHEN L. TAYLOR
Keyword(s):  
Auditor Independence ◽  
Nonaudit Services

Client Importance, Nonaudit Services, and Abnormal Accruals

2003 ◽  
Vol 78 (4) ◽  
pp. 931-955 ◽  
Author(s):  
Hyeesoo Chung ◽  
Sanjay Kallapur
Keyword(s):  
Economic Theory ◽  
Corporate Governance ◽  
Theory Development ◽  
Auditor Independence ◽  
Big 5 ◽  
Audit Firms ◽  
Jones Model ◽  
Nonaudit Services ◽  
Abnormal Accruals

The economic theory of auditor independence (DeAngelo 1981b) suggests that auditors' incentives to compromise their independence are related to client importance. Using ratios of client fees and of nonaudit fees divided by the audit firm's U.S. revenues or a surrogate for the audit-practice-office revenues as measures of client importance, we investigate their association with Jones-model abnormal accruals. In a sample of 1,871 clients of Big 5 audit firms we do not find a statistically significant association between abnormal accruals and any of the client importance measures. Our theory development also suggests that auditor incentives to compromise independence should increase with the extent of client opportunities and incentives to manage earnings, and decrease with the strength of corporate governance and auditor expertise. We also do not find a statistically significant association between abnormal accruals and client importance in subsets of the samples partitioned by proxies for these factors.

Going-Concern Audit Opinions and the Provision of Nonaudit Services: Implications for Auditor Independence of Bankrupt Firms

2009 ◽  
Vol 28 (1) ◽  
pp. 153-169 ◽  
Author(s):  
Joseph Callaghan ◽  
Mohinder Parkash ◽  
Rajeev Singhal
Keyword(s):  
Negative Relationship ◽  
Audit Fees ◽  
Managerial Incentives ◽  
Auditor Independence ◽  
Empirical Question ◽  
Going Concern ◽  
Nonaudit Services ◽  
Auditor Fees ◽  
The Relationship ◽  
The U.S

SUMMARY: Researchers in the area of auditor independence have examined the relationship between auditors' opinions and auditor-provided services. While DeFond et al. (2002) and Geiger and Rama (2003) fail to find auditor impairment for distressed U.S. companies, Sharma (2001) and Sharma and Sidhu (2001) find a negative relationship between the likelihood of a going-concern (GC) opinion and nonaudit fees paid to auditors for bankrupt Australian companies. These conflicting results may arise from jurisdictional differences between Australia and the U.S. or differential managerial incentives and firm costs between distressed and bankrupt firms. In light of these differences, an empirical question exists as to whether the results of the Australian studies will obtain in the U.S. We examine the relationship between the propensity of auditors to render GC opinions and nonaudit fees (and other auditor fees) for a sample of bankrupt U.S. firms. We do not observe any association between GC opinions and nonaudit fees, audit fees, total fees, or the ratio of nonaudit fees to total fees.

scholarly journals A theoretical approach to auditor independence and audit quality

2020 ◽  
Vol 17 (2) ◽  
pp. 124-141
Author(s):  
Rahman Yakubu ◽  
Tracey Williams
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Audit Fees ◽  
Auditor Independence ◽  
Accounting Scandals ◽  
Audit Firms ◽  
Mandatory Audit Firm Rotation ◽  
The Impact ◽  
Insight Into

Auditor independence and the quality of audit report is of growing concern to regulators, institutional investors and stakeholders as a series of accounting scandals have undermined the professionalism of auditors. The findings from this study produced an insight of how auditor’s independence improve audit quality and that abnormal audit fees is as a result of additional effort for auditor to carry out rigorous audit engagement as a result of wider audit scope; that mandatory audit firm rotation will enhance auditor independence, and that audit committee with nonexecutive independence will promote audit quality. The study also finds that in terms of auditor size, smaller audit firms that belong to professional bodies will provide higher audit quality. The main conclusion of this research is that where an auditor is fully independent in carrying out audit engagement with strong resistance to fees pressure will enhance audit quality. This research provides insight into the impact of IFRS adoption on audit fees.

Audit and Nonaudit Fees and the Market's Reaction to Earnings Announcements

2006 ◽  
Vol 25 (1) ◽  
pp. 1-26 ◽  
Author(s):  
Julia L. Higgs ◽  
Terrance R. Skantz
Keyword(s):  
Earnings Quality ◽  
Earnings Announcements ◽  
Positive Association ◽  
Audit Fees ◽  
Continuous Variable ◽  
Auditor Independence ◽  
Negative Association ◽  
Forecast Errors ◽  
Unexpected Earnings ◽  
Nonaudit Services

Effective February 05, 2001, publicly traded companies are required to disclose audit and nonaudit fees paid to their external auditors. These fee data have been used to test whether auditor independence is impaired when the external auditor provides nonaudit services to a client, usually by examining whether certain earnings characteristics are related to nonaudit fees in ways that suggest impairment. This paper follows in that tradition by testing whether the earnings response coefficient (ERC), a proxy for earnings quality, is associated with engagement profitability. Residual fees derived from a two-stage regression model that prices audit and nonaudit services simultaneously are used to proxy for engagement profitability. If the market perceives abnormally profitable engagements as a threat to auditor independence, then we would expect the ERC to be lower for firms with positive fee residuals. The paper examines the residual fee-ERC relation for annual earnings announcements immediately before and after first-time fee disclosure. We report results for alternative measures of unexpected earnings (I/B/E/S forecast errors and deviations from a seasonal random walk), different formulations of residual fees (as a dichotomous and continuous variable) and different samples. For total fees and audit fees, there is a positive association between ERCs and the level of residual fees. For nonaudit fees, there is only one combination of unexpected earnings and residual fee formulation where we observe a significantly negative association between ERCs and residual fees. The findings for audit fees are consistent with a market that interprets abnormally high audit fees as a signal of a firm's commitment to high earnings quality. The restrictive conditions under which we find a negative association between nonaudit fees and ERCs provide limited support for the contention that perceived auditor independence is impaired by abnormally high nonaudit fees.

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