Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980
    18 Aug 2011Working Paper Summaries

    Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980

    by Kevin Koh, Shivaram Rajgopal and Suraj Srinivasan
    What are the costs and benefits of auditors providing non-audit services? In this paper, the authors investigate whether high non-audit services (NAS) fees relative to audit fees are associated with poor quality financial reporting. Associate Professor Suraj Srinivasan and colleagues look specifically at a sample of S&P 500 firms during the years 1978-80. The authors thus provide an early history analysis of a long-standing regulatory concern that NAS fees create an economic dependence that causes the auditor to acquiesce to the client's wishes in financial reporting, reducing the quality of the audit. This concern led the Sarbanes-Oxley Act to prohibit auditors from providing most consulting services. The authors find that, contrary to regulatory concerns, NAS are associated with better quality financial reporting: lower earnings management and higher earnings informativeness. Conclusions rely on the specific institutional features of the years 1978-80. Key concepts include:
    • Providing NAS does not automatically lead to weaker audit quality.
    • Greater information systems consulting fees are associated with higher quality financial reporting for various proxies of earnings quality.
    • This area of consulting likely improved the audit firms' knowledge base, leading to improved audit quality.
    • Evidence suggests that the market does not fear an increase in economic dependence from the non-disclosure of NAS.
    LinkedIn
    Email

    Author Abstract

    We provide evidence on the long standing concern on auditor conflicts of interest from providing non-audit services (NAS) to audit clients by using rarely explored NAS fee data from 1978-80. Using this earlier setting, we find cross-sectional evidence of improved earnings quality when auditors provide NAS, especially those related to information services. This is consistent with better audit quality from knowledge spillovers due to the joint offering of audit and consulting services. Events related to the repeal of these NAS disclosures in 1982 are associated with a small positive stock price reaction suggesting no adverse economic consequences of withdrawing NAS disclosures. Further, following the repeal of disclosure requirements we find no change in the earnings quality of client firms. In sum, data drawn from an earlier time period suggest that auditors' reputational incentives, possible synergies and knowledge transfers imply that NAS offered by audit firms can be associated with improved audit and reporting quality in client firms.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: July 2011
    • HBS Working Paper Number: 12-002
    • Faculty Unit(s): Accounting and Management
      Trending
        • 23 Jun 2022
        • Research & Ideas

        All Those Zoom Meetings May Boost Connection and Curb Loneliness

        • 25 Jan 2022
        • Research & Ideas

        More Proof That Money Can Buy Happiness (or a Life with Less Stress)

        • 21 Jun 2022
        • HBS Case

        Free Isn’t Always Better: How Slack Holds Its Own Against Microsoft Teams

        • 22 Jun 2022
        • Book

        Four Elements for Finding the Right Career Path

        • 18 Apr 2022
        • HBS Case

        Dick’s Sporting Goods Followed Its Conscience on Guns—and It Paid Off

    Suraj Srinivasan
    Suraj Srinivasan
    Philip J. Stomberg Professor of Business Administration
    Unit Head, Accounting and Management
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Accounting
    • Governance
    • Accounting

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College