Stephen L. Taylor
University of New South Wales
Sarah J. Taylor
University of Technology, Sydney
Caitlin Ruddock
Australian Securities and Investments Commission
Abstract: We examine the relation between the provision of non-audit services (NAS) by the incumbent auditor and the extent to which earnings reflects bad news on a timely basis (i.e., earnings conservatism). Reduced earnings conservatism is expected to occur if higher NAS results in reduced auditor independence. Using several different methods for identifying earnings conservatism, we consistently find that higher levels of NAS are not associated with reduced conservatism. This result is also robust across several measures of the potential impact on auditor independence of NAS, as well as research designs addressing the possibly endogenous relation between the purchase of NAS and the extent of earnings conservatism. Our results are consistent with factors such as market-based incentives, the threat of litigation and alternative governance mechanisms offsetting any expected benefits to the audit firm from accepting a reduced level of auditor independence. We therefore conclude that recent legislative intervention aimed at restricting the supply of NAS is unlikely to result in increased independence in fact, although independence in appearance may be improved.
Back to Program
