Work

Nonaudit Services and Earnings Management in the Pre-SOX and Post-SOX Eras

Year: 2011

Type: article

Abstract: Concerns about the impact of auditor-provided non-audit services (NAS) on auditor independence arise because of (1) auditors’ economic dependence on their clients and (2) some specific types of NAS which the SEC argues can harm auditor objectivity. The SEC’s prohibition in 2003 of specific kinds of NAS led to a significant decline in NAS between 2000-2001 and 2004-2005. We argue that this decline in observed NAS fees can be used to identify firms that had a greater likelihood of impaired auditor independence in the pre-SOX period. Using discretionary accruals to proxy for earnings management, we find a positive association between discretionary accruals in the pre-SOX era and the subsequent reduction in NAS, but this was confined to income-decreasing accruals. Further, the association between downwards earnings management and the decline in NAS was reduced in the post-SOX era.

Source: Auditing A Journal of Practice & Theory

DOI: 10.2308/ajpt-10050

Authors: Jayanthi Krishnan, Lixin (Nancy) Su, Yinqi Zhang

Institutions: Temple University, Hong Kong Polytechnic University, American University

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3126023393

FWCI: 11.77

Cites: 55

Cited by: 66

Related to: 10