Types of Nonaudit Fees and Financial Reporting Quality

Hua-Wei Solomon Huang · Suchismita Mishra · Kannan Raghunandan

99 citations0/0 files storedAuditing A Journal of Practice & Theory

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Auditing, Earnings Management, Governance Corporate Governance and Financial Management Financial Reporting and XBRL

Abstract

Ashbaugh, LaFond, and Mayhew (ALM 2003), using data from proxy statements filed in 2001, fail to find that nonaudit fees are associated with biased financial reporting. The SEC (2002, 2003) has asserted that combining all types of nonaudit service fees in a single category would confuse financial statement users, and that audit-related services represent “services that accountants, in effect, must perform for their audit clients” (SEC 2002, 2003). In this paper, we replicate and extend ALM (2003) by using the more finely partitioned data that is required to be disclosed by SEC registrants after FRR No. 68 (SEC 2003). We find some weak evidence that biased financial reporting (in the form of abnormal accruals) is less likely when the tax and other nonaudit fee ratios are high; we do not find an association between high nonaudit fee ratios and meeting or just beating earnings benchmarks. Overall, we fail to find a systematic association between nonaudit service fees and biased financial reporting; thus, our results reinforce the findings of ALM (2003).

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2002The Relation between Auditors' Fees for Nonaudit Services and Earnings Management 2003Exploring the Term of the Auditor-Client Relationship and the Quality of Earnings: A Case for Mandatory Auditor Rotation?2003Do Nonaudit Services Compromise Auditor Independence? Further Evidence 2004Fees Paid to Audit Firms, Accrual Choices, and Corporate Governance 2004Auditor Independence, Non‐Audit Services, and Restatements: Was the U.S. Government Right?*2003Client Importance, Nonaudit Services, and Abnormal Accruals 2002Do Non-Audit Services Compromise Auditor Independence? Further Evidence 2004Professional Service Fees and Auditor Objectivity

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