Professional Service Fees and Auditor Objectivity

✍ Scribed by Reynolds, J. Kenneth; Deis, Donald R.; Francis, Jere R.

• Book ID: 121262115
• Publisher: American Accounting Association
• Year: 2004
• Tongue: English
• Weight: 242 KB
• Volume: 23
• Category: Article
• ISSN: 0278-0380
• DOI: 10.2308/aud.2004.23.1.29

✦ Synopsis

This study investigates whether an auditor's objectivity is impaired by nonaudit services or by the level of economic dependence on a client. Like several contemporaneous studies, we use recent mandated proxy statement audit and nonaudit fee disclosures to measure economic dependence and we use discretionary accruals as a surrogate for auditor objectivity. The results in the extant literature are mixed. We provide some explanations for those inconsistent results.

First, we replicate the results of Frankel et al. (2002), finding, as they did, a significantly positive association between the relative level of nonaudit fees and discretionary accruals. Second, we document that this initial result is primarily due to small-tomedium-sized high-growth firms, especially firms having initial public offerings and in the e-commerce, biomedical, telecommunication, and pharmaceutical industries. After factoring these characteristics into the analysis, we find no evidence that the relative level of nonaudit service fees impairs an auditor's objectivity.