Nonaudit Services and Shareholder Ratification of Auditors

2003 ◽  
Vol 22 (1) ◽  
pp. 155-163 ◽  
Author(s):  
K. Raghunandan
Keyword(s):  
Empirical Support ◽  
Auditor Independence ◽  
Large Majority ◽  
Fortune 1000 ◽  
External Auditor ◽  
Nonaudit Services ◽  
Voting Decisions

The SEC changed its rules recently and required companies to disclose information about audit and nonaudit fees, asserting that such data would be useful for shareholders in making their investment and voting decisions. An analysis of shareholder votes at 172 of the Fortune 1000 companies indicates that the proportion of shareholders voting against or abstaining from ratification of the external auditor is positively associated with the level of the nonaudit fee ratio. The results provide empirical support to the SEC's assertion that disclosure of fees paid to the auditor can influence shareholders' voting decisions. However, even in companies with very large nonaudit fee ratios (exceeding 4.0), the average shareholder ratification rate was about 97 percent. This suggests that a large majority of shareholders did not perceive auditor independence to be impaired, even in the presence of relatively high nonaudit fees.

Do Investors' Perceptions Vary with Types of Nonaudit Fees? Evidence from Auditor Ratification Voting

2005 ◽  
Vol 24 (2) ◽  
pp. 9-25 ◽  
Author(s):  
Suchismita Mishra ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Empirical Support ◽  
Positive Association ◽  
Auditor Independence ◽  
The Other ◽  
Audit Committees ◽  
Single Measure ◽  
Nonaudit Services ◽  
Recent Initiative

In FRR No. 68, the SEC (2003b) updated the rules related to the disclosure of fees paid to the independent auditor by requiring more detailed information about nonaudit fees. The SEC (2002, 2003b) asserted that the partition of nonaudit fees into the categories of audit-related, tax, and other fees would be useful for investors in assessing the auditor's independence and in voting on ratifying the auditor. The SEC suggested that investors would view audit-related and tax services more favorably than “other” nonaudit services. In this paper we test the SEC's assertions by examining shareholder ratification votes, during 2003, at 248 of the S&P 1500 firms. Our results support the SEC's assertion that investors would view audit-related fees differently than the other two types of nonaudit fees. However, contrary to the SEC's assertion, both the tax fee ratio and the other fee ratio have a positive association with the proportion of votes against auditor ratification. The results related to tax fees provide empirical support to the PCAOB's recent initiative to examine the association between tax services and auditor independence. Our results can be useful for client managements and audit committees considering purchases of nonaudit services from auditors. Our findings also suggest that it may be useful to replicate some prior studies (that use a single measure of nonaudit fees) using the newer, more finely partitioned, fee data.

Nonaudit Services and Earnings Conservatism: Is Auditor Independence Impaired?

2006 ◽  
Vol 23 (3) ◽  
pp. 701-746 ◽  
Author(s):  
CAITLIN RUDDOCK ◽  
SARAH J. TAYLOR ◽  
STEPHEN L. TAYLOR
Keyword(s):  
Auditor Independence ◽  
Nonaudit Services

Client Importance, Nonaudit Services, and Abnormal Accruals

2003 ◽  
Vol 78 (4) ◽  
pp. 931-955 ◽  
Author(s):  
Hyeesoo Chung ◽  
Sanjay Kallapur
Keyword(s):  
Economic Theory ◽  
Corporate Governance ◽  
Theory Development ◽  
Auditor Independence ◽  
Big 5 ◽  
Audit Firms ◽  
Jones Model ◽  
Nonaudit Services ◽  
Abnormal Accruals

The economic theory of auditor independence (DeAngelo 1981b) suggests that auditors' incentives to compromise their independence are related to client importance. Using ratios of client fees and of nonaudit fees divided by the audit firm's U.S. revenues or a surrogate for the audit-practice-office revenues as measures of client importance, we investigate their association with Jones-model abnormal accruals. In a sample of 1,871 clients of Big 5 audit firms we do not find a statistically significant association between abnormal accruals and any of the client importance measures. Our theory development also suggests that auditor incentives to compromise independence should increase with the extent of client opportunities and incentives to manage earnings, and decrease with the strength of corporate governance and auditor expertise. We also do not find a statistically significant association between abnormal accruals and client importance in subsets of the samples partitioned by proxies for these factors.

Party Activists, Campaign Resources and Candidate Position Taking: Theory, Tests and Applications

2004 ◽  
Vol 34 (4) ◽  
pp. 611-633 ◽  
Author(s):  
WOOJIN MOON
Keyword(s):  
Empirical Support ◽  
Reciprocal Relationship ◽  
Policy Positions ◽  
Senate Elections ◽  
Party Activists ◽  
Voting Decisions ◽  
Us Senate ◽  
Stage Estimation ◽  
Ideological Voting ◽  
Theoretical Results

Electoral competition is here specified as revolving around both candidate policy positions and non-policy issues.Two candidates spend their resources on non-policy issues to sway citizens' ideological voting decisions but they are constrained by their party activists who provide them with electoral resources. In this setting, a candidate with a resource advantage converges more towards the centre, but a candidate with a resource disadvantage diverges more from the centre. This asymmetry in two candidates' incentives to converge generates the result that the two candidates do not converge towards each other. To test these theoretical results, two-stage estimation is used in this article to solve the reciprocal relationship between policy moderation and campaign resources. This analysis produces strong empirical support for the model in the context of US Senate elections between 1974 and 2000.

Going-Concern Audit Opinions and the Provision of Nonaudit Services: Implications for Auditor Independence of Bankrupt Firms

2009 ◽  
Vol 28 (1) ◽  
pp. 153-169 ◽  
Author(s):  
Joseph Callaghan ◽  
Mohinder Parkash ◽  
Rajeev Singhal
Keyword(s):  
Negative Relationship ◽  
Audit Fees ◽  
Managerial Incentives ◽  
Auditor Independence ◽  
Empirical Question ◽  
Going Concern ◽  
Nonaudit Services ◽  
Auditor Fees ◽  
The Relationship ◽  
The U.S

SUMMARY: Researchers in the area of auditor independence have examined the relationship between auditors' opinions and auditor-provided services. While DeFond et al. (2002) and Geiger and Rama (2003) fail to find auditor impairment for distressed U.S. companies, Sharma (2001) and Sharma and Sidhu (2001) find a negative relationship between the likelihood of a going-concern (GC) opinion and nonaudit fees paid to auditors for bankrupt Australian companies. These conflicting results may arise from jurisdictional differences between Australia and the U.S. or differential managerial incentives and firm costs between distressed and bankrupt firms. In light of these differences, an empirical question exists as to whether the results of the Australian studies will obtain in the U.S. We examine the relationship between the propensity of auditors to render GC opinions and nonaudit fees (and other auditor fees) for a sample of bankrupt U.S. firms. We do not observe any association between GC opinions and nonaudit fees, audit fees, total fees, or the ratio of nonaudit fees to total fees.

Targeting Corporate Political Strategy: Theory and Evidence from the U.S. Accounting Industry

2007 ◽  
Vol 9 (2) ◽  
pp. 1-31 ◽  
Author(s):  
Richard G. Vanden Bergh ◽  
Guy L.F. Holburn
Keyword(s):  
Empirical Support ◽  
Auditor Independence ◽  
Science Literature ◽  
Political Strategy ◽  
Political Campaign ◽  
Accounting Firms ◽  
Political Environments ◽  
Policy Making Process ◽  
Different Types ◽  
Corporate Political Strategy

By analyzing the interaction between a business firm and multiple government institutions (including a regulatory agency, an executive and a bicameral legislature), we develop predictions about how firms target their political strategies at different branches of government when seeking more favorable public policies. The core of our argument is that firms will target their resources at the institution that is ‘pivotal’ in the policy-making process. We develop a simple framework, drawing on the political science literature, which identifies pivotal institutions in different types of political environments. We find empirical support for our thesis in an analysis of how U.S. accounting firms shifted their political campaign contributions between the House and Senate in response to the threat of new regulations governing auditor independence during the 1990s.

External Auditor Evaluations of Outsourced Internal Auditors

2010 ◽  
Vol 29 (2) ◽  
pp. 159-173 ◽  
Author(s):  
Duane M. Brandon
Keyword(s):  
Internal Audit ◽  
Audit Fees ◽  
Accounting Firms ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
Consulting Services ◽  
Significant Area ◽  
External Auditor ◽  
Nonaudit Services

SUMMARY: In the last decade internal auditing services has been a significant area of growth for public accounting firms. Unlike the provision of external audits, the provision of outsourced internal audit services does not prohibit accounting firms from providing the client with additional services. This study investigates some implications of an outsourced internal auditor providing nonaudit services. Specifically, 89 experienced external auditors completed an experiment to investigate whether external auditors will evaluate and rely on an outsourced internal auditor’s work differently when the internal auditor also provides nonaudit services. Results indicate that evaluations of the outsourced internal auditors’ objectivity were negatively affected by the provision of nonaudit services. Further, the differences in objectivity perceptions are tempered by the use of different personnel to provide consulting services. Competence perceptions were not affected. Results also indicate that external auditor reliance on internal audit and suggested audit fees are affected. However, these results do not appear to be tempered by audit and nonaudit staffing decisions.

Audit and Nonaudit Fees and the Market's Reaction to Earnings Announcements

2006 ◽  
Vol 25 (1) ◽  
pp. 1-26 ◽  
Author(s):  
Julia L. Higgs ◽  
Terrance R. Skantz
Keyword(s):  
Earnings Quality ◽  
Earnings Announcements ◽  
Positive Association ◽  
Audit Fees ◽  
Continuous Variable ◽  
Auditor Independence ◽  
Negative Association ◽  
Forecast Errors ◽  
Unexpected Earnings ◽  
Nonaudit Services

Effective February 05, 2001, publicly traded companies are required to disclose audit and nonaudit fees paid to their external auditors. These fee data have been used to test whether auditor independence is impaired when the external auditor provides nonaudit services to a client, usually by examining whether certain earnings characteristics are related to nonaudit fees in ways that suggest impairment. This paper follows in that tradition by testing whether the earnings response coefficient (ERC), a proxy for earnings quality, is associated with engagement profitability. Residual fees derived from a two-stage regression model that prices audit and nonaudit services simultaneously are used to proxy for engagement profitability. If the market perceives abnormally profitable engagements as a threat to auditor independence, then we would expect the ERC to be lower for firms with positive fee residuals. The paper examines the residual fee-ERC relation for annual earnings announcements immediately before and after first-time fee disclosure. We report results for alternative measures of unexpected earnings (I/B/E/S forecast errors and deviations from a seasonal random walk), different formulations of residual fees (as a dichotomous and continuous variable) and different samples. For total fees and audit fees, there is a positive association between ERCs and the level of residual fees. For nonaudit fees, there is only one combination of unexpected earnings and residual fee formulation where we observe a significantly negative association between ERCs and residual fees. The findings for audit fees are consistent with a market that interprets abnormally high audit fees as a signal of a firm's commitment to high earnings quality. The restrictive conditions under which we find a negative association between nonaudit fees and ERCs provide limited support for the contention that perceived auditor independence is impaired by abnormally high nonaudit fees.

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