Non-audit services and financial reporting quality: evidence from 1978 to 1980

Kevin Koh, Shiva Rajgopal and Suraj Srinivasan ()
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Kevin Koh: Nanyang Technological University
Shiva Rajgopal: Emory University
Suraj Srinivasan: Harvard Business School

Review of Accounting Studies, 2013, vol. 18, issue 1, No 1, 33 pages

Abstract: Abstract We provide evidence on the long-standing concern about the potential conflicts of interest of auditors that provide clients with non-audit services using rarely explored non-audit services fee data from 1978 to 1980. In this setting, we find evidence of improved earnings quality when auditors provide non-audit services, especially those related to information services. This is consistent with better audit quality resulting from knowledge spillovers in the joint offering of audit and consulting services. Events related to the 1982 repeal of mandatory non-audit services disclosures are associated with a small positive stock price reaction, suggesting that the disclosure repeal has no adverse economic consequences. Furthermore, following the repeal we find no change in the earnings quality of client firms. In sum, our data suggest that non-audit services offered by audit firms can be associated with improved audit and reporting quality in client firms via auditors’ reputational incentives, synergies, and knowledge transfers.

Keywords: Non-audit services; Audit quality; Auditor independence; Audit fees; Earnings management; Earnings quality (search for similar items in EconPapers)
JEL-codes: G18 G28 G34 K22 M40 M41 M49 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s11142-012-9187-6

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