The effect of non-audit services on investor judgments about auditor independence, auditor knowledge, audit quality and investment.

Abstract

Increasing levels of non-audit services (NAS) provided by auditors to their audit clients, along with large-scale investigations of questionable accounting practices employed by major firms, have brought the issue of auditor independence to the forefront. New SEC proxy disclosure requirements reveal an average NAS fee to audit fee ratio of over 200 percent. The magnitude of these NAS fees, as well as the advocacy issues they raise, increase concerns, not only about the ability of the auditor to be independent, but also how these conflicting roles affect the investing public's perception of the auditor and the financial statements themselves. In a between-subjects experiment, graduate business students viewed financial information and audit fee disclosures about a client firm and indicated their perceptions of auditor knowledge, auditor independence, audit quality, and financial statement reliability. NAS was varied at four levels. Results showed that perceptions of auditor independence, audit quality and the attractiveness of the firm as an investment were negatively affected by the provision of NAS. Asking for judgments about both auditor knowledge and independence allowed analyses that confirmed that audit quality perceptions are primarily influenced by auditor knowledge and independence perceptions, and that audit quality perceptions are the primary indicator of financial statement reliability perceptions.