Accepted by Gordon Richardson. We gratefully acknowledge the comments of David Guenther, In-Mu Haw, Yaw Mensah, Wang Qian, two anonymous reviewers, Gordon Richardson (the editor), and seminar participants at The Chinese University of Hong Kong; Queen's University, Canada; the 2000 Annual Meeting of the American Accounting Association; the 12th Annual Asian-Pacific Conference on International Accounting Issues; and Hong Kong Polytechnic University.
Nonaudit Services and Earnings Management: UK Evidence*
Version of Record online: 15 JAN 2010
2004 Canadian Academic Accounting Association
Contemporary Accounting Research
Volume 21, Issue 4, pages 813–841, Winter 2004
How to Cite
FERGUSON, M. J., SEOW, G. S. and YOUNG, D. (2004), Nonaudit Services and Earnings Management: UK Evidence. Contemporary Accounting Research, 21: 813–841. doi: 10.1506/MFV5-9T3Q-H5RK-VC20
- Issue online: 15 JAN 2010
- Version of Record online: 15 JAN 2010
- Discretionary working capital accruals;
- Financial restatements;
- Nonaudit services;
- Public criticism and regulatory investigation
Using a sample of UK firms for the period 1996-98, we provide empirical evidence on the relation between nonaudit services (NAS) purchase and three proxies for earnings management: (1) the likelihood that client firm accounting practices during the sample period were publicly criticized or subject to regulatory investigation; (2) the likelihood that client firms were required to restate prior financial statements or adjust current year results upon adoption of Financial Reporting Standard (FRS) No. 12, which was intended to curb opportunistic use of provisions; and (3) the mean absolute value of client discretionary working capital accruals over the sample period. The level of NAS purchase is measured, alternatively, as (1) the ratio of nonaudit to total auditor fees, (2) the natural log of NAS fees, and (3) the decile rank of a particular client's NAS fees given all NAS fees received by the audit firm practice office. With one exception, we find that all three measures of earnings management are positively and significantly associated with the three measures of NAS purchase.