Jere R Francis
University of Missouri
Bin Ke
Pennsylvania State University
Abstract: We investigate if the sunshine on auditor-client relations created by the SECs mandated proxy statement disclosure of fees for audit and non-audit services has affected the markets perception of auditor independence and the quality of earnings. The SEC implemented the disclosure rule because it wanted the market to have sufficient information to assess the potential impact of the scope of services on auditor independence. If large levels of non-audit services are perceived to impair auditor independence, then the earnings quality of such companies may be suspect. We report evidence that this is the case, and that the market valuation of earnings surprises is significantly lower for 28 percent of the firms in our sample in which non-audit fees exceed audit fees and are over $500,000 in magnitude. The economic impact for the median firm in our sample is a 77 percent reduction in the market valuation of earnings surprises following the proxy statement disclosure of fees.
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