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Non‐audit service fees, auditor characteristics and earnings restatements

Deborah Bloomfield (Touro University International, Cypress, California, USA)
Joshua Shackman (Touro University International, Cypress, California, USA)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 4 January 2008

5409

Abstract

Purpose

The objective of the study is to provide empirical evidence of the impact of non‐audit services (NAS) as well as other auditor characteristics on auditor independence by testing the relationship of NAS fees to the occurrence of financial statement restatements.

Design/methodology/approach

The authors tested whether firms that restate their financial statements have higher levels of total service fees or higher levels of NAS fees than non‐restatement firms. The testing also includes an examination of the relationship between the audit firm size and the audit firm industry specialization to financial statement restatements.

Findings

The study found only limited evidence to support the concept that firms with higher NAS fees are more likely to restate earnings, thereby casting doubt on the public perception that NAS impairs auditor independence and the legislative approval of Section 201 of the Sarbanes‐Oxley Act prohibiting external auditors from providing certain NAS to audit clients as necessary to preserve auditor independence. The study did find stronger evidence that the level of total fees paid to the audit firm is significant in the predictability of a restatement. In addition, the study also found stronger and more conclusive evidence of a negative association to audit firm industry specialization and a strong positive association to Big 5 audit firms.

Practical implications

Results demonstrate the necessity of regulations concerning NAS and conflict of interest.

Originality/value

This paper is an original contribution that demonstrates the importance of auditor characteristics over audit fees in predicting earnings management.

Keywords

Citation

Bloomfield, D. and Shackman, J. (2008), "Non‐audit service fees, auditor characteristics and earnings restatements", Managerial Auditing Journal, Vol. 23 No. 2, pp. 125-141. https://doi.org/10.1108/02686900810839839

Publisher

:

Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited

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