THE MARKET FOR AUDIT SERVICES AND S&P 500 INDEX CLIENTS

Sharad Asthana and Rachana Kalelkar
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Sharad Asthana: The University of Texas at San Antonio
Rachana Kalelkar: The University of Texas at San Antonio

No 22, Working Papers from College of Business, University of Texas at San Antonio

Abstract: Literature on S&P 500 index firms shows that there is significant improvement in the performance due to increased scrutiny of media and investors. Recently Platikonova (2008) documents improvement in the disclosure quality for firms following their inclusion in the index. Since, auditors are responsible for certifying the quality of reporting and the audit fee reflects their perception of earnings quality, we examine whether the improvement in the reporting due to S&P scrutiny is reflected in audit fees. Our analysis shows that audit fees are significantly lower for S&P firms. This suggests that auditors believe that the quality of reporting improves for firms when they enter S&P index. Our further investigation shows that this reduction in fees is higher for firms that stay in the index for longer time. This shows that auditors consider the time length of a firm in the index while providing the discount. Lastly, we find that expert auditor to less likely lowball their fees for S&P clients. In fact we find expert auditors to charge higher fees for auditing S&P firms. Overall we conclude that S&P index scrutiny not only improves firm’s performance but also improves firms reporting.

Keywords: S&P index; Auditors; Audit Fee; Client Risk; Earnings Quality; Industry Experts; Influential Clients (search for similar items in EconPapers)
JEL-codes: C21 D53 G32 M42 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011-03-01
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