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Are Auditors Compromised by Nonaudit Services? Assessing the Evidence

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  • Jere R. Francis

Abstract

Ruddock, Taylor, and Taylor (2006) use an earnings conservatism framework to investigate the effects of nonaudit services (NAS) on earnings conservatism, and to test whether audit quality was impaired by NAS in Australia during the 1990s. They find no evidence of differential conservatism conditional on the level of NAS fees paid to auditors, and thus conclude that NAS have no adverse effect on audit quality. While this result may not extrapolate to the U.S. setting due to institutional difference between the two countries, the study does add to a growing body of empirical evidence that questions whether there is any logical rationale for restricting the scope of the services that auditors provide to their audit clients. In reviewing the NAS research literature over the past 40 years, one has to conclude that there is no “smoking gun†evidence linking the provision of nonaudit services with audit failures. However, the literature also finds that NAS can adversely affect the appearance of auditor independence, and this may be more than a “mere perception†problem, because there is also evidence that stock prices are significantly lower for companies that pay their auditors large fees for nonaudit services.

Suggested Citation

  • Jere R. Francis, 2006. "Are Auditors Compromised by Nonaudit Services? Assessing the Evidence," Contemporary Accounting Research, John Wiley & Sons, vol. 23(3), pages 747-760, September.
    • Handle: RePEc:wly:coacre:v:23:y:2006:i:3:p:747-760
    DOI: 10.1506/4VD9-AE3K-XV7L-XT07
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    References listed on IDEAS

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    7. Caitlin Ruddock & Sarah J. Taylor & Stephen L. Taylor, 2006. "Nonaudit Services and Earnings Conservatism: Is Auditor Independence Impaired?," Contemporary Accounting Research, John Wiley & Sons, vol. 23(3), pages 701-746, September.
    8. Mckinley, S & Pany, K & Reckers, Pmj, 1985. "An Examination Of The Influence Of Cpa Firm Type, Size, And Mas Provision On Loan Officer Decisions And Perceptions," Journal of Accounting Research, Wiley Blackwell, vol. 23(2), pages 887-896.
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