Future Non-Audit Service Fees and Audit Quality
Monika Causholli, Dennis J. Chambers and Jeff L. Payne Contemporary Accounting Research Vol. 31, Issue 3 (September) 2014, pp. 681–712
Overview One of the most hotly debated audit independence issues arising from the spectacular audit failures of the early 2000s has been the provision of non-audit services (NAS) by audit firms to their audit clients. Strong arguments have been made that such services create an economic bond between auditor and client, impairing auditor independence. Equally strong arguments have been made that the provision of NAS improves audit quality as auditors gain greater knowledge of their clients’ operations. The decade of the 2000s saw an explosion of empirical research seeking evidence on this question. Those studies generally found little evidence to support the former argument and some evidence to support the latter. Causholli, Chambers, and Payne (2014) examine the question differently from the prior studies. Citing the incentive effects of partner compensation contracts, they posit that it is the NAS contracts being negotiated during the audit period, rather than the completed service contracts that have the potential to impair auditor independence. They find significant and robust evidence that future NAS are associated with lower audit quality.
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