Research on non-audit service fees and earnings restatements: Implications for auditor independence

The objective of the study was to provide empirical evidence of the impact of Non-Audit Services (NAS) on auditor independence by testing the relationship of NAS fees to the occurrence of financial statement restatements. This was accomplished by testing whether firms that restate their financial statements have higher levels of non-audit service fees than non-restatement firms. The test population included restatement firms drawn from the GAO database on financial statement restatements and non-restatement firms selected from a 10-K search on Edgar Online. The financial and fee data for both groups came from the SEC Edgar database and was compiled, categorized and codified into groups to facilitate the testing and analysis. The hypotheses were tested using multiple regression analysis. The tests related to total fees and its related proportion to audit firm revenues, NAS fees and its related proportion to audit firm revenue, and audit firm specialization and size. In addition, a qualitative review of case studies was used to triangulate the study findings.; In doing so the study found no evidence to support the concept that firms with higher non-audit service fees are more likely to restate earnings, thereby refuting the public perception that NAS impairs auditor independence and the legislative approval of Section 201 of the Sarbanes-Oxley Act prohibiting external auditors from providing certain non-audit services to audit clients as necessary to preserve auditor independence. The study did find strong evidence that the level of total fees paid to the audit firm is significant in the predictability of a restatement. In addition, the study also found a negative correlation to audit firm industry specialization and a strong positive correlation to Big5 audit firms.