Duane M. Brandon
Virginia Polytechnic Institute and State University
Aaron D. Crabtree
Virginia Polytechnic Institute and State University
John J. (Jack) Maher
Virginia Polytechnic Institute and State University
Abstract: Recent accounting scandals and audit failures have resulted in excessive criticism of the accounting and auditing professions in the financial press for their role in allowing these situations to evolve in an unanticipated fashion. Part of this denunciation has been leveled at firms financial statement auditors expressing disdain at the presumably substandard work that was completed for their audit clients at the expense of the public good. Our research explores the effects that non-audit services performed by a firms financial statement auditors have on perceived auditor independence in the bond market arena. Specifically, we investigate the effects that the magnitude and relative degree of non-audit services have on the bond rating process. Our results indicate that the level of non-audit services provided by a firms financial statement auditors is negatively associated with that clients bond rating. Further examination indicates these results are primarily driven by firms that obtain relatively high amounts of non-audit services from their financial statement auditors. These results add to the existing non-audit fee literature that is developing in the equity market area, and clarify the role that relative extensive non-audit services play in establishing the perceptions of auditor independence that are incorporated by analysts into the bond rating decision process.
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