Articlegreen2019

Auditor Independence and Fair Value Accounting: An Examination of Nonaudit Fees and Goodwill Impairments

Joseph V. Carcello · Terry L. Neal · Lauren C. Reid · Jonathan E. Shipman

84 citations0/0 files storedContemporary Accounting Research

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Corporate Governance and Financial Management

Abstract

ABSTRACT Inadequate testing of fair value accounting estimates, including goodwill, is often cited as an audit deficiency in PCAOB inspection reports, and, in some cases, these deficiencies have led to enforcement actions against the auditor. As a result of these issues, the PCAOB recently proposed a new auditing standard for fair value accounting. While these regulatory actions suggest that auditors are challenged by the fair value regime of accounting for goodwill, they also highlight an area where the auditor could be influenced by their financial ties to a client. In this study, we test whether nonaudit fees are associated with goodwill impairment decision outcomes. Our results indicate that the nonaudit fees a client pays are inversely related to the likelihood of impairment in settings where goodwill is likely to be impaired. Additional examinations suggest that the negative relation between nonaudit fees and auditor independence is driven by clients who are most incentivized to exert their influence over the auditor.

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References

2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 2003Conservatism in Accounting Part I: Explanations and Implications 2005Corporate Governance and Accounting Scandals 2003Do Nonaudit Services Compromise Auditor Independence? Further Evidence 2002Do Non–Audit Service Fees Impair Auditor Independence? Evidence from Going Concern Audit Opinions 2009Big 4 Office Size and Audit Quality 2010Can Big 4 versus Non-Big 4 Differences in Audit-Quality Proxies Be Attributed to Client Characteristics?2004Fees Paid to Audit Firms, Accrual Choices, and Corporate Governance

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2020Common Auditors and Private Bank Loans*2021Empirical Goodwill Research: Insights, Issues, and Implications for Standard Setting and Future Research 2017Are Material Weaknesses in Internal Controls Associated with Poor M&A Decisions? Evidence from Goodwill Impairment 2020Audit Committee Accounting Expertise and the Mitigation of Strategic Auditor Behavior 2021Do goodwill impairments affect audit opinions? Evidence from China

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