Management

THE RELATION BETWEEN AUDITORS' FEES FOR NON-AUDIT SERVICES AND EARNINGS QUALITY

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We examine the association between the provision of non-audit services and earnings
quality. Because of concerns regarding the effect of non-audit services on financial reporting
credibility, the Securities and Exchange Commission recently issued revised auditor
independence rules requiring firms to disclose in their annual proxy statement the amount of fees
paid to auditors for audit and non-audit services. Using data collected from proxy statements
filed between February 5, 2001 and June 15, 2001, we present evidence that firms purchasing
more non-audit services from their auditor are more likely to just meet or beat analysts' forecasts
and to report larger absolute discretionary accruals. However, the purchase of non-audit services
is not associated with meeting other earnings benchmarks. We also find that the unexpected
component of the non-audit to total fee ratio is negatively associated with stock returns on the
filing date. These results are consistent with arguments that the provision of non-audit services
strengthens an auditor's economic bond with the client and that investors price this effect.

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Series Title

THE RELATION BETWEEN AUDITORS' FEES FOR NON-AUDIT SERVICES AND EARNINGS QUALITY

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Publisher

: ., 2002

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Language

English

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Classification

NONE

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Subject(s)

Corporate Governance

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