Non-Audit Service and Auditor Independence: An Examination of the Procomp Effect
Journal
Review of Quantitative Finance and Accounting
Journal Volume
32
Pages
33–59
Date Issued
2009
Date
2009
Author(s)
Abstract
This paper examines whether non-audit service provision impairs auditor independence, and whether the degree of auditor independence in Taiwan changed in the wake of the 2004 Procomp scandal. The auditors involved in the Procomp affair were suspended from practice for 2 years and were sued, and we posit that these unprecedented sanctions and litigation affected subsequent auditor behavior. Considering the measurement errors involved in discretionary accruals, we propose an alternative analytic approach in which the dependent variable in the regression analysis is the difference between audited earnings and forecast earnings, scaled by total assets, and the primary independent variable is the non-audit fees ratio. After controlling for the effects of financial leverage, operating and market performance, industry, company size, audit firm size, management forecast error, and management attempts to manipulate earnings, regression analysis indicates that the coefficient for non-audit fees ratio is negative and significant in 2003 but not in 2004. Using non-audit fees instead of non-audit fees ratio to conduct the regression analysis yields similar results. This finding is consistent with the notion that auditors make a trade-off between gaining service fees and avoiding litigation and reputation loss. Limitations and policy implications are also offered. © 2007 Springer Science+Business Media, LLC.
Type
journal article
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