Non-audit Services and Financial Reporting Conservatism
Date Issued
2009
Date
2009
Author(s)
Cheng, Wei-Ju
Abstract
This study aims to examine whether the provision of material nonaudit services by incumbent auditors is associated with a reduction in the financial reporting conservatism. Reduced financial reporting conservatism is expected to occur if relatively high levels of nonaudit services result in stronger economic dependence and reduced auditor independence.onservatism is measured using the Basu (1997) model that regresses earnings on returns and allows the return coefficient to vary with the sign of the return. With a sample of 594 firm-year observations over the 2002 to 2007 time period, the regression results are as follows: (1)The results of several different tests consistently support that financial reporting is conservative in Taiwan. (2)There is a significant negative association between the purchase of nonaudit services, proxied by the ratio of nonaudit fees to total fees (NAFR), and the financial reporting conservatism. The results are robust in the additional tests which control the market-to-book ratio at the beginning of the fiscal year, and which use alternative measure of economic bond between auditors and their clients. (3)There is a significant negative assocation between nonaudit services, proxied by nonaudit fees taken natural log (LNNAF), and conservatism. However, this effect is less pronounced in the additional tests. The relation is insignigicant, although nonaudit fees are still negatively associated with conservatism.aken together, the empirical evidence of this study implies that the provision of material nonaudit services by incumbent auditors may weaken auditor independence, which is an issue that must be taken seriously.
Subjects
nonaudit services
financial reporting conservatism
auditor independence
economic dependency
File(s)![Thumbnail Image]()
Loading...
Name
ntu-98-R96722020-1.pdf
Size
23.32 KB
Format
Adobe PDF
Checksum
(MD5):7cf45d4030835b5bab566f28ea3bf150