Title

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

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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