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Non-audit Services and Bias and Accuracy of Voluntary Earnings Forecasts Reviewed by Incumbent CPAs

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  • Chen-Lung Chin
  • Shou-Min Tsao

    (National Central University in Chungli, Taiwan)

  • Hsin-Yi Chi

    (Department of Business Administration, National Central University)

Abstract

This paper examines the association between the quality of voluntary earnings forecasts, as measured by forecast bias and accuracy reviewed by an incumbent CPAs, and the purchase of non-audit services (NAS) from the incumbent auditor. In the context of this study, we focus primarily on the Taiwanese market. Unlike in the UK and US, management forecasts must be reviewed by the incumbent CPA in Taiwan. Besides, enforcement of rules with regard to the provision of review-level assurance for management earnings forecasts tends to be less stringent than one of audit-level assurance for financial reporting. Using panel data of audit and non-audit fees available for Taiwanese firms, we find that firms with a high ratio of NAS tend to issue more optimistically biased and inaccurate forecasts under a lower auditor liability regime. These results provide some support for concerns expressed about the potential impact of unusually high levels of NAS on auditor independence and ultimately, the quality of audited financial reports. The findings also suggest that examining the auditor, and in particular, the provision of non-audit services, in isolation of an institutional environment provides an incomplete analysis of financial reporting. Copyright (c) 2007 The Authors; Journal compilation (c) 2007 Blackwell Publishing Ltd.

Suggested Citation

  • Chen-Lung Chin & Shou-Min Tsao & Hsin-Yi Chi, 2007. "Non-audit Services and Bias and Accuracy of Voluntary Earnings Forecasts Reviewed by Incumbent CPAs," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(4), pages 661-676, July.
  • Handle: RePEc:bla:corgov:v:15:y:2007:i:4:p:661-676
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    Cited by:

    1. Esther B. Brio & Ilidio Lopes-e-Silva & Javier Perote, 2016. "Effects of opportunistic behaviors on security markets: an experimental approach to insider trading and earnings management," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(3), pages 379-402, December.
    2. Philip Law, 2010. "The influence of the types of NAS provisions and gifts hospitality on auditor independence," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 18(2), pages 105-117, June.

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