Do high-reputation companies pay more non-audit fees?

Abstract

Purpose

The purpose of this study is to investigate the association between companies’ reputation and their purchase of non-audit services (NAS).

Design/methodology/approach

This study measures company reputation using the reputation scores from Fortune’s “America’s Most Admired Companies” list. Multivariate analysis is performed to examine the association between public companies’ overall reputation and their decision of NAS purchase. Robustness checks are performed to control for self-selection bias and alternate measures are used to proxy for company reputation and NAS fees.

Findings

This study finds that high-reputation companies on average pay more NAS fees than their counterparts. The results suggest that due to less severe agency conflicts, high-reputation companies tend to purchase more NAS from their incumbent auditors to appreciate the potential benefits of the auditors’ knowledge spillovers.

Originality/value

The findings of this study on the association between company reputation and NAS fees contribute to the literature by providing additional insight on the factors influencing companies’ NAS purchases. The results of this study suggest that a unique company-level characteristic, company reputation, is significantly associated with companies’ NAS purchase, and therefore has both policy and practical implications for the demand of NAS. This study also adds to the growing literature on the influence of company reputation on corporate behavior by documenting the important role that company reputation plays in the managerial decision-making process.

Citation

Huang, X. and Kang, F. (2022), "Do high-reputation companies pay more non-audit fees?", Accounting Research Journal, Vol. 35 No. 2, pp. 145-159. https://doi.org/10.1108/ARJ-07-2020-0171