Accepted by Dan Simunic. An earlier version of this paper was presented at the 2004 Contemporary Accounting Research Conference, generously supported by the Canadian Institute of Chartered Accountants and Ordre des comptables agréés du Québec. Professor Francis is also an Honorary Professorial Fellow, University of Melbourne.
Are Auditors Compromised by Nonaudit Services? Assessing the Evidence*
Article first published online: 15 JAN 2010
2006 Canadian Academic Accounting Association
Contemporary Accounting Research
Volume 23, Issue 3, pages 747–760, Fall 2006
How to Cite
Francis, J. R. (2006), Are Auditors Compromised by Nonaudit Services? Assessing the Evidence. Contemporary Accounting Research, 23: 747–760. doi: 10.1506/4VD9-AE3K-XV7L-XT07
- Issue published online: 15 JAN 2010
- Article first published online: 15 JAN 2010
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.