RESEARCH ARTICLE
Long term trends in non-audit fees and audit quality: New evidence based on going concern opinions and financial restatements
Pallab Kumar Biswas,
Paul A. Griffin,
David H. Lont,
Pallab Kumar Biswas
Department of Accountancy and Finance, University of Otago, Dunedin, New Zealand
Search for more papers by this authorCorresponding Author
Paul A. Griffin
University of California, Davis, California, USA
Correspondence
Paul A. Griffin, University of California, Davis, CA, USA.
Email: [email protected]
Search for more papers by this authorDavid H. Lont
Department of Accountancy and Finance, University of Otago, Dunedin, New Zealand
Search for more papers by this authorPallab Kumar Biswas,
Paul A. Griffin,
David H. Lont,
Pallab Kumar Biswas
Department of Accountancy and Finance, University of Otago, Dunedin, New Zealand
Search for more papers by this authorCorresponding Author
Paul A. Griffin
University of California, Davis, California, USA
Correspondence
Paul A. Griffin, University of California, Davis, CA, USA.
Email: [email protected]
Search for more papers by this authorDavid H. Lont
Department of Accountancy and Finance, University of Otago, Dunedin, New Zealand
Search for more papers by this authorFirst published: 24 November 2024
Abstract
We revisit the question of whether high levels of non-audit fees degrade audit quality. We use a structural model to specify the key variables and a grouping approach to reduce measurement error and tighten identification of the non-audit fee threat to audit quality. We use going concern opinions (GCOs) and financial restatements to proxy for audit quality. We find that higher non-audit fees reduce the percentage of GCOs issued around the passage of the Sarbanes–Oxley Act of 2002 (SOX), and that restatements are higher around SOX also. The trends in the GCO and restatement percentages after SOX are consistent with an improvement in audit quality.
Open Research
DATA AVAILABILITY STATEMENT
All data are from public sources identified in the paper.
Supporting Information
| Filename | Description |
|---|---|
| acfi13376-sup-0001-Tables-S1-S5.docxWord 2007 document , 39.6 KB |
Table S1. Table S2. Table S3. Table S4. Table S5. |
Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.
REFERENCES
- AICPA. (2022) AU-C section 240 consideration of fraud in a financial statement audit. Washington, DC: AICPA.
- Angrist, J. & Pischke, J. (2009) Mostly Harmless Econometrics: An Empiricist’s Companion. Princeton University Press.
10.1515/9781400829828 Google Scholar
- Beaver, W., Clarke, R. & Wright, W. (1979) The association between unsystematic security returns and the magnitude of earnings forecast errors. Journal of Accounting Research, 17, 316–340.
- Beaver, W., Lambert, R. & Morse, D. (1980) The information content of security prices. Journal of Accounting and Economics, 2, 3–28.
10.1016/0165-4101(80)90013-0 Google Scholar
- BEIS. (2022) Restoring trust in audit and corporate governance government response to the consultation on strengthening the UK's audit, corporate reporting and corporate governance systems. Department for Business, Energy & Industrial Strategy. Available from: https://www.gov.uk/government/consultations/restoring-trust-in-audit-and-corporate-governance-proposals-on-reforms. Last accessed 19 November 2024.
- Bertomeu, J., Liang, Y. & Marinovic, I. (2023) A primer on structural estimation in accounting research. Foundations and Trends Account, 18, 1–137.
10.1561/1400000074 Google Scholar
- Blankley, A.I., Hurtt, D.N. & MacGregor, J.E. (2012) Abnormal audit fees and restatements. Auditing: A Journal of Practice & Theory, 31, 79–96.
- Blay, A. & Geiger, M. (2013) Auditor fees and auditor independence: evidence from going concern reporting decisions. Contemporary Accounting Research, 30, 579–606.
- Bloomfield, D. & Shackman, J. (2008) Non-audit service fees, auditor characteristics and earnings restatements. Managerial Auditing Journal, 23, 125–141.
10.1108/02686900810839839 Google Scholar
- Bloomfield, D.S. & Jackman, J. (2004) Non-audit service fees, auditor characteristics and earnings restatements. Managerial Auditing Journal, 23, 125–141.
10.1108/02686900810839839 Google Scholar
- Bound, J., Jaeger, D.A. & Baker, R.M. (1995) Problems with instrumental variables estimation when the correlation between the instruments and the endogenous explanatory variable is weak. Journal of the American Statistical Association, 90, 443–450.
- Breuer, M., Labro, E.V.A., Sapra, H. & Zakolyukina, A.A. (2024) Bridging theory and empirical research in accounting. Journal of Accounting Research, 62, 1121–1139.
- Carcello, J.V., Neal, T.L., Reid, L.C. & Shipman, J.E. (2020) Auditor Independence and fair value accounting: an examination of nonaudit fees and goodwill impairments. Contemporary Accounting Research, 37, 189–217.
- Carey, P.J., Geiger, M.A. & O'Connell, B.T. (2008) Costs associated with going-concern-modified audit opinions: an analysis of the Australian audit market. Abacus, 44, 61–81.
- Carson, E., Fargher, N.L., Geiger, M.A., Lennox, C.S., Raghunandan, K. & Willekens, M. (2013) Audit reporting for going-concern uncertainty: a research synthesis. Auditing: A Journal of Practice & Theory, 32, 353–384.
- Causholli, M., Chambers, D.J. & Payne, J.L. (2014) Future nonaudit service fees and audit quality. Contemporary Accounting Research, 31, 681–712.
- Causholli, M., De Martinis, M., Hay, D. & Knechel, W. (2011) Audit markets, fees and production: towards an integrated view of empirical audit research. Journal of Accounting Literature, 29, 167–215.
- Chan, L., Chen, T.-Y., Janakiraman, S. & Radhakrishnan, S. (2012) Reexamining the relationship between audit and nonaudit fees: dealing with weak instruments in two-stage least squares estimation. Journal of Accounting, Auditing and Finance, 27, 299–324.
10.1177/0148558X11409154 Google Scholar
- Che, L. & Svanström, T. (2021) Are audit partners' compensation and audit quality related to their consulting revenues? Journal of Accounting and Public Policy, 40, 106896.
10.1016/j.jaccpubpol.2021.106896 Google Scholar
- DeAngelo, L. (1981) Auditor size and audit quality. Journal of Accounting and Economics, 3, 183–199.
10.1016/0165-4101(81)90002-1 Google Scholar
- Deaton, A. (1985) Panel data from time series of cross-sections. Journal of Econometrics, 30, 109–126.
- Dechow, P.M., Ge, W., Larson, C.R. & Sloan, R.G. (2011) Predicting material accounting misstatements. Contemporary Accounting Research, 28, 17–82.
- DeFond, M., Francis, J. & Carcello, J. (2005) Audit research after Sarbanes-Oxley. Auditing: A Journal of Practice & Theory, 24, 5–40.
- DeFond, M., Raghunandan, K. & Subramanyam, K. (2002) Do non-audit service fees impair auditor independence? Evidence from going concern audit opinions. Journal of Accounting Research, 40, 1247–1274.
- DeFond, M. & Zhang, J. (2014) A review of archival auditing research. Journal of Accounting and Economics, 58, 275–326.
- Ettredge, M., Reed, M. & Stone, M. (2000) An examination of substitution among monitoring devices: the case of internal and external audit expenditures. Review of Quantitative Finance and Accounting, 15, 57–79.
10.1023/A:1008365720747 Google Scholar
- Ferguson, M.J., Seow, G.S. & Young, D. (2004) Nonaudit services and earnings management: UK evidence. Contemporary Accounting Research, 21, 813–841.
- Firth, D. (1993) Bias reduction of maximum likelihood estimates. Biometrika, 80, 27–38.
- Foster, G., Olsen, C. & Shevlin, T. (1984) Earnings releases, anomalies, and the behavior of security returns. The Accounting Review, 59, 574–603.
- FRC. (2022) FRC welcomes government plans to bring forward audit and corporate governance reforms. Available from: https://www.frc.org.uk/news-and-events/news/2022/05/frc-welcomes-government-plans-to-bring-forward-audit-and-corporate-governance-reforms/
- Geiger, M. & Rama, D. (2003) Audit fees, non-audit fees, and auditor reporting on stressed companies. Auditing: A Journal of Practice & Theory, 22, 53–69.
- Geiger, M.A., Gold, A. & Wallage, P. (2019) A synthesis of research on auditor reporting on going-concern uncertainty: an update and extension. Foundation for Auditing Research, 2019, 1–161.
- Habib, A. (2012) Non-audit service fees and financial reporting quality: a meta-analysis. Abacus, 48, 214–248.
- Hallas, N., Coello, K. & Keohane, S. (2022) Twenty-year review of audit and non-audit fee trends. Sutton, MA: Audit_Analytics, Inc.
- Hausman, J.A. (1978) Specification tests in econometrics. Econometrica, 46, 1251–1271.
- Hope, O.K. & Langli, J.C. (2010) Auditor Independence in a private firm and Low litigation risk setting. The Accounting Review, 85, 573–605.
- Hoque, Z., Covaleski, M.A. & Gooneratne, T.N. (2013) Theoretical triangulation and pluralism in research methods in organizational and accounting research. Accounting, Auditing & Accountability Journal, 26, 1170–1198.
- Hossain, M., Raghunandan, K. & Rama, D.V. (2020) Abnormal disclosure tone and going concern modified audit reports. Journal of Accounting and Public Policy, 39, 106764.
- Hossain, S., Chapple, L. & Monroe, G.S. (2018) Does auditor gender affect issuing going-concern decisions for financially distressed clients? Accounting and Finance, 58, 1027–1061.
- Hyslop, D. & Imbens, G. (2001) Bias from classical and other forms of measurement error. Journal of Business and Economic Statistics, 19, 475–481.
- Ioannidis, J.P.A. (2012) Why science is not necessarily self-correcting. Perspectives on Psychological Science, 7, 645–654.
- Kahn, R. & Whited, T.M. (2017) Identification is not causality, and vice versa. The Review of Corporate Finance Studies, 7, 1–21.
10.1093/rcfs/cfx020 Google Scholar
- Kao, J.L., Li, Y. & Zhang, W. (2013) Has SOX enhanced non-big 4 Auditors' ability to deal with client pressure? Accounting Perspectives, 12, 141–164.
10.1111/1911-3838.12012 Google Scholar
- Kinney, W., Palmrose, Z. & Scholz, S. (2004) Auditor independence, non-audit services, and restatements: was the U.S. government right? Journal of Accounting Research, 42, 561–588.
- Klassen, K.J., Lisowsky, P. & Mescall, D. (2016) The role of auditors, non-auditors, and internal tax departments in corporate tax aggressiveness. The Accounting Review, 91, 179–205.
- Larcker, D.F. & Rusticus, T.O. (2010) On the use of instrumental variables in accounting research. Journal of Accounting and Economics, 49, 186–205.
- Lennox, C.S. (2016) Did the PCAOB's restrictions on auditors' tax services improve audit quality? The Accounting Review, 91, 1493–1512.
- Lim, C. & Tan, H. (2008) Non-audit service fees and audit quality: the impact of auditor specialization. Journal of Accounting Research, 46, 199–246.
- Low, H. & Meghir, C. (2017) The use of structural models in econometrics. Journal of Economic Perspectives, 31, 33–58.
- Mahieux, L. (2022) Auditors' incentives and audit quality: non-audit services versus contingent audit fees. The European Accounting Review, 33, 1–37.
- Maurer, M. (2023) PwC to limit consulting services it offers to U.S. audit clients the big four accounting firm plans several new initiatives through 2026 to boost audit quality. The Wall Street Journal Sept. 11, 2023.
- Mishra, S., Raghunandan, K. & Rama, D.V. (2005) Do investors' perceptions vary with types of nonaudit fees? Evidence from auditor ratification voting. Auditing: A Journal of Practice & Theory, 24, 9–25.
- Modell, S. (2015) Theoretical triangulation and pluralism in accounting research: a critical realist critique. Accounting, Auditing & Accountability Journal, 28, 1138–1150.
- Nelson, C. & Startz, R. (1990) The distribution of the instrumental variables estimator and its t-ratio when the instrument is a poor one. The Journal of Business, 63, S125–S140.
- PCAOB. (1988) AS 2415: consideration of an entity's ability to continue as a going concern. Effective for audits of financial statements for periods beginning on or after January 1, 1989. Also AU-C Section 570. The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern.
- PCAOB. (2005) Ethics and independence rules concerning independence, tax services, and contingent fees. Public Company Accounting Oversight Board Release No. 2005-014. (July 26). Washington, DC.
- PCAOB. (2015) Concept release on audit quality indicators. Release No. 2015-005. July 1, 2015. PCAOB Rulemaking Docket Matter No. 041.
- PCAOB. (2023) Standards and emerging issues advisory group meeting discussion-going concern.
- Pearson, T.I.M. & Trompeter, G. (1994) Competition in the market for audit services: the effect of supplier concentration on audit fees. Contemporary Accounting Research, 11, 115–135.
10.1111/j.1911-3846.1994.tb00439.x Google Scholar
- Pomeroy, B. & Thornton, D. (2008) Meta-analysis and the accounting literature: the case of audit committee independence and financial reporting quality. The European Accounting Review, 17, 305–330.
- Raghunandan, K., Read, W.J. & Whisenant, J.S. (2003) Initial evidence on the association between nonaudit fees and restated financial statements. Accounting Horizons, 17, 223–234.
10.2308/acch.2003.17.3.223 Google Scholar
- Ratzinger-Sakel, N. (2013) Auditor fees and auditor independence: evidence from going concern reporting decisions in Germany. Auditing: A Journal of Practice & Theory, 32, 129–168.
- Read, W.J. & Yezegel, A. (2018) Going-concern opinion decisions on bankrupt clients: evidence of long-lasting auditor conservatism? Advances in Accounting, 40, 20–26.
10.1016/j.adiac.2017.12.004 Google Scholar
- Robinson, D. (2008) Auditor independence and auditor-provided tax service: evidence from going-concern audit opinions prior to bankruptcy filings. Auditing: A Journal of Practice & Theory, 27, 31–54.
- Rotello, C.M., Heit, E. & Dubé, C. (2015) When more data steer us wrong: replications with the wrong dependent measure perpetuate erroneous conclusions. Psychonomic Bulletin & Review, 22, 944–954.
- Rutledge, R.W., Karim, K.E. & Luo, X. (2014) The effects of SOX on firms audited by big-4 versus non-big-4 audit firms. Journal of Accounting and Finance, 14, 2158–3625.
- Scholz, S. (2013) Financial restatement trends in the United States: 2003–2012. Washington, DC: Center for Audit Quality. Affiliated with the American Institute of CPAs.
- Seetharaman, A., Sun, Y. & Wang, W. (2011) Tax-related financial statement restatements and auditor-provided tax services. Journal of Accounting, Auditing and Finance, 26, 677–698.
10.1177/0148558X11409146 Google Scholar
- Sievers, S. & Sofilkanitsch, C. (2019) Determinants of financial misreporting: a survey of the financial restatement literature. Available from: https://doi.org/10.2139/ssrn.3231740
10.2139/ssrn.3231740 Google Scholar
- Simunic, D. (1980) The pricing of audit services: theory and evidence. Journal of Accounting Research, 18, 161–190.
- Simunic, D. (1984) Auditing, consulting, and auditor independence. Journal of Accounting Research, 22, 679–702.
- Stein, M., Simunic, D. & O'Keefe, T. (1994) Industry differences in the production of audit services. Auditing: A Journal of Practice & Theory, 13, 128–142.
- Tepalagul, N. & Lin, L. (2015) Auditor Independence and audit quality a literature review. Journal of Accounting, Auditing and Finance, 30, 101–121.
- Velte, P. (2023) The link between corporate governance and corporate financial misconduct. A review of archival studies and implications for future research. Management Review Quarterly, 73, 353–411.
- Wald, A. (1940) The fitting of straight lines if both variables are subject to error. Annals of Mathematical Statistics, 11, 284–300.
- Whalen, D. & Manyak, K. (2020) Eighteen year review of audit fee & non-audit fee trends. Audit Analytics.
- Zhang, Y., Hay, D. & Holm, C. (2016) Non-audit services and auditor independence: Norwegian evidence. Cogent Business & Management, 3, 1215223.
10.1080/23311975.2016.1215223 Google Scholar
