Nonaudit services and earnings management in the Pre-SOX and Post-SOX eras
Document Type
Journal article
Source Publication
Auditing: A Journal of Practice and Theory
Publication Date
1-1-2011
Volume
30
Issue
3
First Page
103
Last Page
123
Publisher
American Accounting Association
Keywords
Earnings management, Nonaudit services, Sarbanes-Oxley Act
Abstract
Concerns about the impact of auditor-provided nonaudit services (NAS) on auditor independence arise because of (1) auditors' economic dependence on their clients, and (2) some specific types of NAS which the Securities and Exchange Commission (SEC) argues can harm auditor objectivity. The SEC's prohibition in 2003 of specific kinds of NAS led to a significant decline in NAS between 2000-2001 and 2004- 2005. We argue that this decline in observed NAS fees can be used to identify firms that had a greater likelihood of impaired auditor independence in the pre-SOX period. Using discretionary accruals to proxy for earnings management, we find a positive association between discretionary accruals in the pre-SOX era and the subsequent reduction in NAS, but this was confined to income-decreasing accruals. Further, the association between downward earnings management and the decline in NAS was reduced in the post-SOX era.
DOI
10.2308/ajpt-10050
Print ISSN
02780380
E-ISSN
15587991
Publisher Statement
Copyright ©
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Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Krishnan, J., Su, L., & Zhang, Y. (2011). Nonaudit services and earnings management in the Pre-SOX and Post-SOX eras. Auditing: A Journal of Practice and Theory, 30(3), 103-123. doi: 10.2308/ajpt-10050