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Nonaudit Services and Auditor Independence:
Are Investors' Perceptions Different in a Post Sarbanes-Oxley World?
Nena Park,
Ernst & Young
C. Terry Grant, California State University Fullerton
Stephen W. Wheeler, University of the Pacific
ABSTRACT. Based on first-time auditor fee disclosures, prior studies find mixed results of investor’s perceptions of the effect of nonaudit services on auditor independence. We investigate whether the prohibition of certain nonaudit services under SOX caused investors to change their independence perceptions when incumbent auditors provide nonaudit services. Examining fee disclosures for S&P 500 companies pre- and post-SOX, we find evidence that the importance of nonaudit fee information in explaining abnormal stock price returns changed between the two periods. However, after partitioning the sample on the importance of the client to the auditors’ nonaudit business, a significant negative association is found between high levels of nonaudit fees and abnormal returns, both pre- and post-SOX, in high-importance nonaudit groups. These findings suggest investors were just as concerned about independence impairment before and after the passage of SOX for relatively important nonaudit clients.
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