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Non-audit services and financial reporting quality: evidence from 1978 to 1980

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Listed:
  • Kevin Koh

    (Nanyang Technological University)

  • Shiva Rajgopal

    (Emory University)

  • Suraj Srinivasan

    (Harvard Business School)

Abstract

We provide evidence on the long-standing concern about the potential conflicts of interest of auditors that provide clients with non-audit services using rarely explored non-audit services fee data from 1978 to 1980. In this setting, we find evidence of improved earnings quality when auditors provide non-audit services, especially those related to information services. This is consistent with better audit quality resulting from knowledge spillovers in the joint offering of audit and consulting services. Events related to the 1982 repeal of mandatory non-audit services disclosures are associated with a small positive stock price reaction, suggesting that the disclosure repeal has no adverse economic consequences. Furthermore, following the repeal we find no change in the earnings quality of client firms. In sum, our data suggest that non-audit services offered by audit firms can be associated with improved audit and reporting quality in client firms via auditors’ reputational incentives, synergies, and knowledge transfers.

Suggested Citation

  • Kevin Koh & Shiva Rajgopal & Suraj Srinivasan, 2013. "Non-audit services and financial reporting quality: evidence from 1978 to 1980," Review of Accounting Studies, Springer, vol. 18(1), pages 1-33, March.
    • Handle: RePEc:spr:reaccs:v:18:y:2013:i:1:d:10.1007_s11142-012-9187-6
    DOI: 10.1007/s11142-012-9187-6
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    JEL classification:

    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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