Article2003

Audit Fees, Nonaudit Fees, and Auditor Reporting on Stressed Companies

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

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Auditing, Earnings Management, Governance Financial Distress and Bankruptcy Prediction Corporate Governance and Financial Management

Abstract

The SEC and legislators have expressed concerns that independence may be negatively impacted if auditors perform significant nonaudit services for their audit clients, and that providing lucrative nonaudit services to clients may make it more likely that auditors will “see things the client's way.” Such concerns are particularly salient in the context of issues that involve significant auditor judgment, as in the case of reporting decisions related to going-concern uncertainties for financially stressed clients. In this study we examine the association between the magnitude of audit and nonaudit fees and auditor report modification decisions for financially stressed manufacturing companies. In our analysis we control for financial stress, company size, reporting lag, default status, audit committee effectiveness, and management plans. The results indicate a significant positive association between the magnitude of audit fees and the likelihood of receiving a going-concern modified audit opinion, but we find no significant association between nonaudit fees and audit opinions. Additional analyses also find no significant relationship between the ratio of nonaudit service fees to audit fees and reporting decisions, and indicate that our results are robust across alternative model, variable, and sample specifications. We also control for the potential endogeneity of audit opinions, audit fees, and nonaudit fees, and find the same positive association of audit fees with opinions, but no association between nonaudit fees and audit opinions. Overall, we find no evidence of a significant adverse effect of nonaudit fees on auditor reporting judgments for our sample of distressed companies.

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References

1978Specification Tests in Econometrics 1984Methodological Issues Related to the Estimation of Financial Distress Prediction Models 1980The Pricing of Audit Services: Theory and Evidence 1981Auditor independence, ‘low balling’, and disclosure regulation 2003Do Nonaudit Services Compromise Auditor Independence? Further Evidence 2002Do Non–Audit Service Fees Impair Auditor Independence? Evidence from Going Concern Audit Opinions 1984Auditing, Consulting, and Auditor Independence 2000Audit Committee Composition and Auditor Reporting

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