American Accounting Association 2006 Midwest Region Meeting March 30 – April 1 Chicago, Illinois

Friday, March 31, 10:20 a.m.-12:00 noon
Concurrent session 2A - Discrimination and Corporate Responsibility (Public Interest)

Title: Non-Audit Fees, Auditor Independence and Auditor Litigation

Hua-Wei Huang Diwan College of Management	Ena Rose-Green Southern Illinois University Edwardsville
Chih-Chen Lee Northern Illinois University

ABSTRACT: On the presumption that non-audit service fees compromise auditor independence and result in lower quality audits, the Sarbanes-Oxley Act (SOX) of 2002 bans certain non-audit services for audit clients. SOX, however, did not stop the debate on the effects of non-audit service fees on auditor independence. DeFond and Francis (2005) argue that the decision to ban non-audit services is at best misguided and at worst politically motivated. In response to their call for further research in this area, our study examines the effects of non-audit fees on auditor litigation. We also investigate the effects of audit fees, total service fees and tax fees on auditor litigation. Our results indicate that the magnitude of non-audit fees and total service fees are positively associated with auditor litigations. Interestingly, we found no significant association between tax fees and auditor litigation. Our results hold after controlling for client firm size, client firm industry and financial statement fraud.

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