New Book on Non-Audit Services and Financial Reporting Quality published

Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980
Authors: Kevin Koh, Shivaram Rajgopal, and Suraj Srinivasan
Published: August 18, 2011
Paper Release Date: July 2011
Feature: Working Papers

What are the costs and benefits of auditors providing non-audit
services? In this paper, the authors investigate whether high
non-audit services (NAS) fees relative to audit fees are associated
with poor quality financial reporting. Associate Professor Suraj
Srinivasan and colleagues look specifically at a sample of S&P 500
firms during the years 1978-80. The authors thus provide an early
history analysis of a long-standing regulatory concern that NAS fees
create an economic dependence that causes the auditor to acquiesce to
the client's wishes in financial reporting, reducing the quality of
the audit. This concern led the Sarbanes-Oxley Act to prohibit
auditors from providing most consulting services. The authors find
that, contrary to regulatory concerns, NAS are associated with better
quality financial reporting: lower earnings management and higher
earnings informativeness. Conclusions rely on the specific
institutional features of the years 1978-80