The Relation Between Auditors' Fees for Non-Audit Services and Earnings Quality (Classic Reprint)

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Excerpt from The Relation Between Auditors' Fees for Non-Audit Services and Earnings Quality The analysis is based on auditor fee data collected from proxy statements filed with the sec between February 5, 2001, and June 15, 2001. We use the fee disclosures to construct two measures of non - audit services. The first measure is the ratio of non-audit fees to total fees (feeratio). The second measure disaggregates total fees into its non-audit (ranknon) and audit (rankaud) components, both of which we measure as the percentile ranks for each client of a given auditor. Results from the first set of tests indicate a significant positive association between the purchase of non-audit fees and earnings management. Feeratio and rankn ON are significantly higher for firms just meeting analyst forecasts. In contrast, both measures are negative and significant for firms just missing analyst forecasts. However, we find no association between either feeratio or rankn ON and two other earnings benchmarks, small increases in earnings and small positive earnings. The results also indicate that feeratio and ranknon are significantly higher for firms with high absolute discretionary accruals. These results are robust across several alternative specifications, and indicate that firms purchasing more non-audit services manage earnings to a greater extent than other firms. We interpret this evidence as consistent with the argument that the provision of non-audit services strengthens an auditor's economic bond with the client. About the Publisher Forgotten Books publishes hundreds of thousands of rare and classic books. Find more at www.forgottenbooks.com This book is a reproduction of an important historical work. Forgotten Books uses state-of-the-art technology to digitally reconstruct the work, preserving the original format whilst repairing imperfections present in the aged copy. In rare cases, an imperfection in the original, such as a blemish or missing page, may be replicated in our edition. We do, however, repair the vast majority of imperfections successfully, any imperfections that remain are intentionally left to preserve the state of such historical works.