1. Beaulieu P. Dan a. Reinstein_Belief Perseverance

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Belief perseverance among accounting practitioners

regarding the effect of non-audit services on auditor

independence

Philip Beaulieu a,1, Alan Reinstein b,*

a Haskayne School of Business, University of Calgary, Canadab School of Business Administration, Wayne State University, Detroit, MI 48202-3930, USA

a r t i c l e i n f o

Article history:

a b s t r a c t

We hypothesize, based on management control processes in large

firms (Covaleski et al., 1998), that large-firm practitioners will be

less likely than small-firm auditors to report beliefs that non-audit

services (NAS) impair auditor independence. Based on Goldman

and Barlev’s (1974) analysis of auditor-firm conflict of interests

and procedural independence safeguards, we also predict that

auditors will report less concern over impairment than non-audi-

tors. We investigate also belief perseverance – whether practitio-

ners tend to maintain prior reported beliefs after reading

research on the relationship between NAS and auditor indepen-

dence.

Practitioners reported their beliefs before and after reading a

summary of Frankel et al. (2002) indicating that providing NAS

may impair independence; Ashbaugh et al. (2003) suggesting that

independence is not impaired; or a summary of both findings.

Twenty-six percent of small-firm practitioners and 23% of non-

auditors reported prior beliefs that NAS impair independence,

much larger proportions than for large-firm practitioners (5%)

and auditors (6%). After reading the summary 20% of small-firm

practitioners and 19% of non-auditors changed their answers, lar-

ger proportions than for large-firm practitioners (9%) and auditors

(8%). Results generally support our hypotheses and suggest that as

evidence regarding the effectiveness of key provisions of the

Sarbanes–Oxley Act of 2002 emerges, accounting practitioners will

maintain their beliefs, but react differently depending upon their

0278-4254/$ - see front matter 2010 Elsevier Inc. All rights reserved.

doi:10.1016/j.jaccpubpol.2010.06.005

* Corresponding author. Tel.: +1 313 577 4530/248 368 8841/248 420 1522; fax: +1 248 368 8950.

E-mail addresses: [email protected], [email protected] (P. Beaulieu), [email protected] (A. Reinstein).1 Tel.: +1 403 220 7304; fax: +1 403 210 2217.

J. Account. Public Policy 29 (2010) 353–373

Contents lists available at ScienceDirect

J. Account. Public Policy

j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / j ac c p u b p o l

http://dx.doi.org/10.1016/j.jaccpubpol.2010.06.005mailto:[email protected]:[email protected]:[email protected]://dx.doi.org/10.1016/j.jaccpubpol.2010.06.005http://www.sciencedirect.com/science/journal/02784254http://www.elsevier.com/locate/jaccpubpolhttp://www.elsevier.com/locate/jaccpubpolhttp://www.sciencedirect.com/science/journal/02784254http://dx.doi.org/10.1016/j.jaccpubpol.2010.06.005mailto:[email protected]:[email protected]:[email protected]://dx.doi.org/10.1016/j.jaccpubpol.2010.06.005


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specializations and firm affiliations. This will affect public policy to

the extent that accountants and auditors, rather than academics,

report research findings to regulators.

2010 Elsevier Inc. All rights reserved.

1. Introduction

The following statement about the effects of providing non-audit services (NAS) on auditor inde-

pendence is an excerpt of an interview with Rodger Hughes, former partner in charge of Pricewater-

houseCoopers UK Assurance and Business Advisory Services (Nixon 2004, p. 34).

To this day, no one has produced any evidence, and indeed academic studies have actually proved

otherwise, to demonstrate that providing non-audit services creates any problem in terms of audit

quality. And there are very good arguments that providing some non-audit services improves the

audit quality.

This idea that it’s somehow wrong to provide other services to audit clients is complete and utternonsense, and anyone who really understands what we do wouldn’t be fooled by that. There’s no

doubt that there are certain services that make absolute sense for your auditors to do and couldn’t

in any way be regarded as compromising auditor independence.

By referring to supporting ‘‘academic studies,” this statement seeks to convince the public that

accounting firms do not impair audit quality when they offer NAS. In the larger context, the interview

is part of large firm attempts to influence public policy on auditor independence that began in 2000,

when the SEC proposed new independence rules. The Big Five accounting firms first intensified their

lobbying efforts by approaching members of Congress, increasing correspondence to the SEC, and

sharply increasing campaign contributions (Boyd, 2004; Turner, 2006). Since the Enron and WorldCom

scandals and passage of the Sarbanes–Oxley Act (SOX) in 2002 that limited the types of NAS that auditfirms could perform for their audit clients, lobbying has continued and is being extended to the issue

of legal liability, where the Big Four firms have pursued caps (Directorship, 2007). The firms have eco-

nomic incentives to advocate their positions on these issues: Big Four firms’ fastest growing segment

in 2007 was advisory services, at rates of 15–25% (Deloitte, 2007; Ernst and Young, 2007; KPMG, 2007;

PricewaterhouseCoopers, 2007). Because much of that growth occurred in such international markets

as China, large CPA firms may wish to discourage the spread of SOX-style regulation to such markets.

Even within the US, large firms continue to advocate relaxing current independence rules that can in-

hibit competition among accounting firms, according to William Parrett, Global CEO of Deloitte Tou-

che Tohmatsu (Deloitte, 2006). Large firms may be concerned about state boards of accountancy that

contemplate adopting certain SOX provisions for governmental, regulatory and other audits, i.e., a

‘‘cascade effect” of SOX (Brau and Fawcett, 2006). They will likely continue lobbying against such leg-islative interventions, nationally and internationally (Labaton and Glater 2003; Morris, 2003). Such

lobbying may become even more prevalent as debate over the costs and benefits of SOX intensifies

(Hemphill, 2005) and Congressional and Mayoral leaders (Schumer and Bloomberg, 2006) call for

new legislation.

The quote is significant because, in summarizing the results of academic studies, Mr. Hughes acts as

a high-profile intermediary between the accounting academy and stakeholders in capital markets –

investors, regulators, and other accounting practitioners not conversant with academic research.

How intermediaries like Mr. Hughes view research could affect public policy more than the original

publications, which non-academic audiences may not perceive as relevant (Tuttle and Dillard,

2007). We analyze non-academics’ reported beliefs both before and after reading about new research,

to understand better the process by which the research affects policy. We rely upon two seminal pa-pers from outside the belief revision literature to channel the discussion in this new direction; the first

is Covaleski et al.’s (1998) ethnographic study of management control in Big Six accounting firms. We

hypothesize that large-firm control systems lead practitioners to report less concern about the rela-

tionship between NAS and auditor independence than would small-firm practitioners.

354 P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353–373


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The second seminal paper is Goldman and Barlev’s (1974) analysis of power relationships between

auditors and their clients, where the state of professional ethics helps auditors minimize client pres-

sure. We hypothesize that auditors, who experience first-hand the effects of independence and inter-

nal independence safeguards (Kinney, 1999), are less likely than non-auditors to report beliefs that

providing NAS could impair independence, regardless of their firm’s sizes.2 We also predict that

large-firm auditors will be less likely than any other practitioners (non-auditors in large firms and all

small-firm practitioners) to report beliefs that NAS could compromise auditor independence.

A second set of hypotheses addresses changes in self-reported beliefs after practitioners read sum-

maries of credible research on the effect of provision of NAS on auditor independence. These hypoth-

eses are founded on the concept of belief perseverance, the tendency to maintain prior beliefs even in

the face of contradictory information (Anderson et al., 1980; Anderson and Lindsay, 1998; Anderson,

2007; Slusher and Anderson, 1996). While expecting (based on belief perseverance) that research

summaries will not greatly influence practitioners’ beliefs in general, we nevertheless predict differ-

ences in belief revision related to occupational group. We argue that avowal processes that large

accounting firms’ management control systems support (Covaleski et al., 1998) motivate large-firm

practitioners to engage in belief perseverance more than do small-firm practitioners. Similarly, profes-

sional ethics’ role in maintaining auditors’ power relationships with their clients (Goldman and Barlev,1974) motivates them to persevere in their beliefs more than non-auditors. Practitioners with the

strongest motivation to persevere are auditors in large firms, where avowal and power dynamics re-

lated to ethics are combined.

Two papers with similar methods but contrary results provide the research needed to test the

hypotheses. Frankel et al. (2002) found in part that non-audit fees associate positively with the mag-

nitude of their clients’ discretionary accruals, providing evidence consistent with the view that such

services compromise auditor independence. Ashbaugh et al. (2003) performed tests similar to Frankel

et al. but after controlling for firm performance found ‘‘no systematic evidence supporting their claim

that auditors violate their independence as a result of clients purchasing relatively more non-audit

services” (p. 611). These papers, appearing in the same journal within 1 year and using the same re-

search methods, present contradictory results about the independence issue. We summarized the pa-pers as part of a questionnaire for distribution to four groups of practitioners: large-firm auditors,

large-firm non-auditors, small-firm auditors, and small-firm non-auditors. Practitioners randomly re-

ceived a summary of Frankel et al., Ashbaugh et al., or both. This research design differs from other

research on practitioners’ beliefs about independence in that other studies manipulated information

found in hypothetical audit cases e.g., Imhoff, 1978; Lowe et al., 1999; Wright and Booker, 2005).

We asked two nominal multiple-choice questions: one on agreement that auditing firms impair

their independence when accepting non-audit fees from audit clients, and the other for a range of

non-audit fees that would likely compromise independence. The first time these questions appeared

(before the summary) all of the hypotheses were supported. Large-firm practitioners were less likely

than small-firm practitioners to indicate that auditing firms impair their independence when perform-

ing NAS for their audit clients. Auditors answered positively less often than non-auditors and a smallerpercentage of large-firm auditors compared to all other practitioners reported beliefs that indepen-

dence could be impaired. Large-firm practitioners, auditors, and large-firm auditors also responded

differently to the question on non-audit fees than their comparison groups (small-firm practitioners,

non-auditors, and all other practitioners respectively), groups that more likely answered that rela-

tively small ratios of non-audit fees to total fees could impair auditor independence.

After respondents read the summary, we asked both questions a second time. Regarding impair-

ment of independence, when firms accept non-audit fees from audit clients, 9% of large-firm practitio-

ners, 8% of auditors, and only 5% of large-firm auditors changed their answers. About 20% of their

comparison groups (small-firm practitioners, non-auditors, and all other practitioners) changed an-

swers, significantly greater fractions and consistent with the differential belief persistence hypotheses.

Results regarding changes in answers to the non-audit fees question were in the predicted direction

2 Non-auditing practitioners may specialize in any area other than auditing. We define auditors as practitioners who describe

themselves as such in our instrument.

P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353–373 355


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but not as strong. Large-firm practitioners reported significantly fewer changes in their beliefs less

than small-firm practitioners (11% versus 20%); no significant differences arose regarding auditors

versus non-auditors or large-firm auditors compared to all other practitioners.

The following section reviews the literature on the effect of providing NAS on auditor indepen-

dence, management control in large firms, the role of ethics in conflict of interest, and belief persis-

tence. Six hypotheses, three each on practitioners’ initial and revised beliefs, are then presented.

The remaining sections present the method, results, and conclusions.

2. Literature review and hypothesis development

2.1. Auditor independence and non-audit services

The Second General Auditing Standard and Audit (AU) Section 220 requires CPAs to maintain inde-

pendent mental attitudes in all audits and attest engagements. This framework consistently views

auditor independence as a trait ‘‘correlated with the relatively unobservable traits of integrity and

objectivity” (Kinney 1999, p. 70). AICPA Professional Standards [Code of Professional Conduct] (ET)Section 101.01 (Independence) requires all CPAs providing attest and non-attest professional engage-

ments to maintain their independence (e.g., independence in mind and in appearance). However,

empirical research usually avoids defining auditor independence strictly in terms of ‘‘unobservable”

mental states that are virtually impossible to prove (Schneider et al., 2006). The domain of empirical

research contains such observable correlates of independence as providing NAS and ownership stakes

in client firms.

SEC Final Rule S7-13-00 (20003a), Revision of the Commission’s Auditor Independence Requirements,

classifies an unobservable independent mental attitude as independence in fact, but also imposes

proxy statement disclosures of non-audit fees to help ascertain an auditor’s capability to make impar-

tial judgments. The disclosure requirements address independence in appearance. Rule S7-13-00

deems an auditor not independent of a client in appearance ‘‘if a reasonable investor, with knowledgeof all relevant facts and circumstances, would conclude that the auditor is not capable of exercising

objective and impartial judgment” (SEC, 2000, Section I, quoted in Frankel et al., 2002, p. 73). As stated

in the preceding paragraph, empirical research focuses on observable correlates of independence such

as non-audit fee disclosures, and thus is consistent with the Rule’s orientation towards independence

in appearance. We also focus on independence in appearance in this paper.

Frankel et al.’s (2002) finding that non-audit fees are positively associated with the magnitude of

clients’ discretionary accruals stimulated interest in the association between these variables and its

implications regarding auditor independence. Ashbaugh et al. (2003) countered their result by per-

forming similar tests with additional controls for firm performance and found no such consistent rela-

tionship between non-audit fees and discretionary accruals. Chung and Kallapur (2003) also replicated

Frankel et al. controlling for industry effects and were unable to find a relationship. Geiger and Rama(2003) did not find a significant effect of non-audit fees on audit opinions in a sample of distressed

firms. Kinney et al. (2004) had mixed results regarding the association between NAS and restatements,

but reported a general lack of adverse economic impacts. Larcker and Richardson (2004) found a po-

sitive association between the ratio of non-audit fees to total fees and unexpected accruals, but only

for 8.5% of their sample, consisting of smaller firms with distinctive corporate governance (including

higher insider holdings). Reynolds et al. (2004) replicated the Frankel et al. result, but after controlling

for high-growth clients found that the Frankel et al. result for the fee ratio disappeared. Mitra and

Hossain (2007) found that blockholders of common stock vary negatively with the non-audit service

fee ratio, suggesting that they play a monitoring role and affect management’s decision to purchase

NAS.

In summary, research since Frankel et al. (2002) has qualified their result to specific sample char-acteristics and has reduced concern over the relationship between auditor independence and NAS. An

exception to this generalization is Srinidhi and Gul (2007), who concluded that non-audit fees are

associated with a loss of audit quality, while audit fees result in higher quality. Nevertheless, together

Frankel et al. and Ashbaugh et al. (2003) have formed the foundation for most archival research on the



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relationship between NAS and auditor independence in this decade, thus helping to motivate this

study of belief perseverance among accounting and auditing practitioners.

2.2. Practitioners’ stated beliefs about auditor independence and non-audit services [NAS]

The accounting profession has historically opposed restrictions on the scope of services auditors

can provide to their audit clients, e.g., AICPA CEO Melancon’s (2000a, p. 26) response to the SEC’s

(2000) proposal to proscribe 10 non-audit services that auditors could provide to their audit clients.

He said that ‘‘no study of the perceptions of users of audited financial information supports the mas-

sive shift in public policy that the proposed rule would enforce.” Whether Melancon accurately as-

sessed public support for proposed rule changes, his blanket statement raises the question, ‘‘Will all

practitioners state that there is a relationship between auditor independence and provision of NAS

and will they disregard evidence to the contrary?” We answer this question by dividing practitioners

into subsamples based on two criteria: size of the accounting firm and area of specialization (audit

versus non-audit).

We assert that the divergent interests of large and small accounting firms cause varying beliefsabout independence in appearance.3 The former group’s self-interest would favor regulators allowing

their firms to offer NAS; competing with other professional service consulting firms requires CPA firms

to market and cross-sell the largest possible array of services ( Wyatt, 2004).4 Before passage of the SOX

and Section 404 increased the demand for compliance services, auditing was deemed a mature industry

in contrast to the growth area of NAS, with the long-term success of accounting firms then linked to mar-

keting such services. For example, former Touche Ross managing partner Russell Palmer (1989) stresses

that this maturation process had changed the profession’s very identity due to the increasing importance

of consulting to a profession once defined by its auditing function; the expanding product base for audits

can no longer satisfy larger firms’ need for growth. However, before passage of the SOX, SEC Chair Levitt

(2000) noted that consulting services represented an ever-increasing proportion of larger CPA firms’ total

revenues, a trend that could impair their independence.5

Large accounting firms’ lobbying efforts regarding independence rules reflect their economic inter-

ests. In the 1990s, the large firms and the AICPA resisted SEC attempts to restrict consulting services

that they could offer to audit clients (Wyatt, 2004). Gerde and White (2003) note that in 2000 the Big

Five firms argued that the SEC’s proposed segregation of work requirements restrained trade, por-

trayed as a conflict largely between large accounting firms and the SEC. In 2002–2003, the Big Four

accounting firms lobbied the SEC to classify due diligence work on mergers as audit-related fees,

rather than audit fees (Weil and Rapoport, 2003), hoping that this classification would attract less

attention regarding independence. In January 2003, after large firm lobbying, the SEC decided not

to restrict tax work performed for audit clients (Parker, 2003).6 However, SEC Release No. 34-53677

(June 2, 2006) reversed this conclusion in light of the Public Company Accounting Oversight Board’s

(PCAOB) rulings prohibiting auditors from performing certain tax services.

Thus far we argue that large accounting firms’ self-interests regarding NAS can be inferred from

their lobbying positions; a literature on socialization in the profession and practitioners’ identification

with their firms (e.g., Fogarty and Dirsmith, 2001; Empson, 2004; Almer et al., 2005) provides a basis

for extending firm-level positions to the reported beliefs of individuals. Covaleski et al.’s (1998) eth-

3 In the rest of the paper, we call independence in appearance independence unless otherwise specified.4 Large firms have divested themselves of consulting services, but Wyatt (2004) claims they did so under duress rather than

under the belief that they acted in the firms’ best interests.5 Nonetheless, AICPA President Melancon (2000b) stated that despite such possible threats to independence, competition to

recruit accounting graduates helps justify large firms’ performing such services. Limiting the array of NAS could hinder such firms

from recruiting highly qualified graduates who may wish to perform both consulting work and audit services. SOX Section 208’s

requiring at least a 1-year cooling off period for [high-level] auditors moving to client firms exacerbates this problem. Facing such

narrow career paths, potential recruits may shun public accounting for private industry or government. Jean Wyer of

PriceWaterhouseCoopers commented on the impairment of recruiting effects of the 1-year cooling-off period at a 2005 American

Accounting Association Auditing Midyear Meeting plenary session.6 We assume that these lobbying activities supply a frame of reference to individual large-firm practitioners regarding the

independence issue, and that they tend to adjust their beliefs accordingly.



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nographic field study of management control in Big Six firms suggests that individual practitioners

will report beliefs that are consistent with their firms’ positions. Covaleski et al. (1998, p. 300) rely

on the process of avowal as Foucault (1988) described to characterize control in Big Six firms as fol-

lows (emphasis added):

In the following sections, our purpose is to demonstrate how Management by Objective (MBO) andmentoring can be understood as managerial programs directed at transforming the subjectivity of

‘‘professionals” into entrepreneurs or corporate clones. In particular, whereas MBO as a disciplinary

technique seeks to forge corporate clones by integrating individual goals within firm goals, men-

toring, as a technique of the self, is complicit in realizing corporate clones when people avow orga-

nizational imperatives as their own.

The organizational imperative at issue here is large accounting firms’ ability to offer NAS to their

audit clients; Covaleski et al. (1998) establish that control systems are in place to encourage large-firm

practitioners to avow positions supporting provision of NAS, particularly that auditor independence is

not compromised. Such ethnographic studies have not been conducted in smaller accounting firms,

and we make no assertions as to whether they generally rely on avowal as a control process. However,

smaller firms have not lobbied as large firms have, participate less in the audit market, and do not

share the same economic interests, so less reason arises to expect them to use avowal processes spe-

cifically to encourage practitioners to express the opinion that provision of NAS does not compromise

auditor independence.

The depth of personal conviction of practitioners’ avowed positions consistent with firms’ imper-

atives faces much interpretation and debate. We asked them direct questions about independence,

recognizing that two dimensions exist in these self-reports: practitioners’ (1) true beliefs, which

may be subconscious and consequently difficult to report (Moore et al., 2006) and (2) actual reports

to others (e.g., to researchers). The latter dimension entails an awareness of reporting a position, albeit

anonymously, to all readers of the survey results. We do not pretend to capture private beliefs and

changes therein that may be inaccessible to practitioners, even if they wanted to report them. We take

these self-reports at face value; they are the beliefs that practitioners want represented, through us, to

the public.7 We predict that self-reports of beliefs will suggest more concern about effects of NAS on

independence among small-firm than large-firm practitioners, who may be encouraged to avow that

independence can be maintained.

H1. Small accounting firm (auditors and non-auditors combined) practitioners will be more likely

than large firm (auditors and non-auditors combined) practitioners to report beliefs that providing

non-audit services to audit clients will reduce auditor independence.

Besides effects of economic interests on practitioners’ beliefs, we posit a specialization effect such

that auditors should usually view providing NAS as a smaller threat to independence than would non-

auditors. We posit two sources of auditors’ beliefs on this topic: procedural and ethical. First, auditors

experience restrictive independence guidelines within their firms which, combined with compensa-

tion plans that protect auditors’ economic interests, ‘‘encourage objectivity and integrity of the audi-

tor” (Kinney, 1999, p. 73). These safeguards exist regardless of the state of external regulation and

sanction (Kinney, 1999), although external principles, rules and threats likely strengthen the percep-

tion among auditors that safeguards are effective.

Second, we apply Goldman and Barlev’s (1974) theory of conflict of interests and power relation-

ships, cited in papers such as Nichols and Price (1976), Shockley (1981), Knapp (1985), and Green

(2005). In this theory, a key source of power for accounting firms seeking to resist audit client pressure

is the state of professional ethics, especially if they are elaborate and ‘‘vigorously and visibly enforced”

7

An alternative explanation of our approach to reported beliefs is that we have incorporated demand effects into the researchdesign (explained more fully in the methods section). Participants are fully aware that the research question concerns the

relationship between providing NAS and auditor independence, and how the research summary is related to this issue. We rely on

their awareness to predict differences in what could be considered the personal lobbying positions of various groups of

practitioners. We generalize to what practitioners will report to the public about this issue and the effect of research on their

beliefs, not to how they would interact with actual audit clients.



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ries of the Frankel et al. (2002), Ashbaugh et al. (2003), or both papers. Surveys are appropriate for col-

lecting data to help understand or predict human behavior (Alreck and Settle, 1985) and to obtain

respondents’ preferential characteristics (Rea and Parker, 1997).

The questionnaire contains four parts: Part A, demographic questions; Part B, questions concerning

their beliefs about auditor independence; Part C, the article summary followed by the same questions

about auditor independence that appeared in Part B; and Part D, an open-ended question asking why

the summary paragraph did or did not affect respondents’ opinions on the topic. Respondents were

asked in Part C to give the same answers as in Part B if their opinions did not change or to select

an alternative if they revised their opinions. They were told that they could refer back to Part B if they

wanted to check their prior answers.

At the beginning of Part B, the following paragraph defined independence in appearance and direc-

ted respondents to answer questions with respect to this concept.

Part B contains questions about auditor independence, which SEC Final Rule S7-13-00 defines as ‘‘a men-

tal state of objectivity and lack of bias.” Since mental states are difficult to observe, the SEC set out an

independence ‘‘in appearance” criterion, such that ‘‘if a reasonable investor, with knowledge of all rel-

evant facts and circumstances, would conclude that the auditor is not capable of exercising objectiveand impartial judgment,” then an auditor is not considered independent of a client. In all of the following

questions, assume that independence refers to independence in appearance

The two multiple-choice questions that appeared in Parts B and C follow. Neither question asks

about the state of mind of individual auditors – independence in fact; they ask about independence

based on firm-level non-audit fees, which may appear to compromise independence. The first ques-

tion is categorical while the second allows respondents to report the strength of their positions. For

example, those most willing to indicate that non-audit fees compromise independence may select

the first quartile (a) rather than the second (b).

1 Auditing firms impair their independence when they accept non-audit fees from audit

clients.a. Yes b. No c. Depends upon circumstances d. Do not know

2. Non-audit fees representing what percentage of total audit firm fees will likely

compromise the auditors’ independence?

a. 1–25% d. 76–100%

b. 26–50% e. Do not know

c. 51–75%

Per H1–H3, small-firm practitioners, non-auditors, and all except large-firm auditors would more

likely answer yes to the first question than large-firm practitioners, auditors, and large-firm auditors.

The former groups would tend to select lower ranges of percentages in response to the second ques-

tion. H4–H6 predict that the former groups would be more likely to select different responses to these

questions when asked a second time in Part C.

In Part C we developed three versions of a one-paragraph summary: (1) Frankel et al. (2002) sug-

gesting that such NAS impair auditor independence; (2) Ashbaugh et al. (2003) suggesting that inde-

pendence is not impaired; and (3) a summary of both (see Appendix A). The third version, slightly

longer than the other two, states that the two studies support different conclusions due to Ashbaugh

et al.’s controlling for firm performance. There are three reasons for this balanced design. First, we

did not assume that all respondents in any group (small firm, large firm, etc.) had the same priorbeliefs about the effects of NAS on independence, and therefore we could not target summaries

to individual respondents. Second, with respect to the second question about the ratio of non-audit

fees to total audit firm fees that would likely compromise auditors’ independence, a summary could

be consistent with respondents’ prior beliefs and they could select a stronger consistent answer (an


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even lower or higher range consistent with priors). Therefore, summaries both inconsistent and con-

sistent with prior beliefs were of interest. Third, a version of the summary covering both papers was

included to give some indication as to which paper may have been more persuasive in a direct

comparison.

All summaries were written in a ‘‘neutral” language, were quite similar, and delivered a simple

message about the effect of NAS on auditor’s independence. They described the two experimental

variables as discretionary income-increasing accruals, which is a measure of earnings management,

and the ratio of non-audit fees to total fees. A positive association between these variables, found

in Frankel et al. (2002) but not in Ashbaugh et al. (2003), suggests that providing NAS reduces inde-

pendence. Identifying the source journal as The Accounting Review, we noted in the summaries that

findings in each paper were based on large samples of about 3000 observations.9 Pre-testing the survey

instrument on 10 local CPA practitioners, four national CPA practitioners, five accounting and business

professors, and four local Financial Executives Institute [FEI] chapter members revealed no comprehen-

sion difficulties.

The concise summaries describe only the two variables of interest, a definition of earnings manage-

ment, the sample size, the result, and a conclusion regarding the effect of provision of NAS on auditor

independence.10 This presentation allows us to conclude that changes in answers represent reactions toa specific test, i.e., an attempt to maintain internal validity. But, as is common in experimental research

designs, questions about external validity remain. Frankel et al. (2002) and Ashbaugh et al. (2003) in-

clude many other tests and interpretations; our design could not present the full articles to respondents,

ask them to read and understand them, and then infer that changes in their answers were reactions to

specific findings. We do not attempt to draw conclusions regarding these or other accounting and audit-

ing research papers as complete documents.

3.2. Survey method

We asked senior contact persons to distribute versions of our questionnaire to many of their firms’

staff professionals. Respondents could either return the anonymous responses to the contact persons

(who would return them to us in sealed envelopes) or send them to us directly. One author also

administered the surveys to targeted users and preparers attending professional meetings in a large

Midwest metropolitan area prior to his meeting presentations and to two large accounting firms’

groups of public auditors. Response rates were indeterminable for either technique because we do

not know the number of questionnaire recipients.

4. Results

Of 349 received responses, 24 (7%) who reported having read TAR after 2001 were deleted from the

sample to ensure that Frankel et al., (2002) or Ashbaugh et al. (2003) did not affect reported initialbeliefs.11 Table 1, Panel A shows the distribution of the remaining responses by subgroup, defining

small firms as having up to 500 professional employees and large firms over 500.12 Practitioners

who indicated that their professional work involves (does not involve) auditing work were classified

9 While Frankel et al. (2002) and Ashbaugh et al. (2003) used the ratio of non-audit fees to total fees, we instead used the ratio of

non-audit fees to audit fees—believing that this ratio is a bit clearer to our respondents. In any event, both sets of ratios should

provide fairly equivalent results. We note, however, that Ashbaugh et al. [p. 612] preferred using the sum of audit and non-audit

fees, rather than the fee ratio to help measure economic dependence, but we wanted to use comparable variables for our

summaries.10 The summary of both Frankel et al. (2002) and Ashbaugh et al. (2003) also included an explanation for the difference in the

papers’ results.11 We also ran statistical tests including the 24 TAR readers, and the results were unaffected. Sixteen other responses were

received from practitioners who did not work for public accounting firms; we deleted these responses.12 The question regarding firm size gave the following ranges of professionals employed in the respondent’s firm as responses

(number of responses in parentheses): 1 (31), 2–5 (49), 6–10 (23), 11–20 (22), 21–50 (43), 51–100 (10), 100–200 (8), 201–500 (14),

and over 500 (125). The final category sought to capture large-firm effects; however, all tests were run with large firms defined as

greater than 200 professionals, and significance levels were not affected.



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as auditor (non-auditors). Non-auditors all had work experience in accounting and/or had accounting

designations (e.g., CPA). Sample sizes range from 28 small-firm auditors to 172 small-firm non-auditors,

but as shown in Table 1, Panel B, within each group the three versions of the summary paragraph were

distributed equally (in thirds). A chi-square test indicates no significant differences in distributions of

paragraph versions.

The first multiple-choice question asked whether auditing firms impair their independence whenthey accept non-audit fees from audit clients, responding yes, no, depends upon circumstances, and do

not know. Frequencies of responses appear in Table 2. Majorities ranging from 56% to 78% of all groups

in Panels A–C selected the ‘‘depends on circumstances” responses, which could be expected given the

complexity of auditor independence. A categorical yes or no answer indicates a strong desire to report

unconditional belief that accepting non-audit fees does or does not affect independence. In Panel A,

consistent with H1, practitioners in small firms were much more likely to answer yes than those in

large firms (26% versus 5%). The former group also indicated less often that impairment depends upon

circumstances (58% versus 70%). The chi-square p value for Panel A is .000.13

As reported in Table 2, Panels B and C, the frequency results regarding the effect of audit special-

ization (H2) and large-firm auditors compared to all other practitioners (H3) are similar to Panel A.

Large-firm auditors answered yes to the impairment question least often (3%, Panel C). The chi-square p value is .000 for Panels B and C.

H4–H6 focus on changes in beliefs following reading the article summary. Regarding the first mul-

tiple-choice question on impairing independence, we combined the ‘‘depends” and the ‘‘do not know”

answers because they are both uncommitted responses. Thus, we classified Table 3 subjects as chang-

ing their answers if there was any change between yes, no, and depends/do not know, and as not

changing their answers if no changes arose between these three categories.

Sixteen percent of the total sample changed their answers to the independence impairment ques-

tion the second time it was asked, after respondents read the summary paragraph. The effect of firm

Table 1

Sample distribution.

Panel A: Responses by subgroup

Small-firm non-auditorsa 172

Small-firm auditors 28

Large-firm non-auditors 52Large-firm auditors 73

Total responsesb 325

Version of

paragraph

conclusion

Small-firm

non-auditors

Small-firm

auditors

Large-firm

non-auditors

Large-firm

auditors

Panel B: Sample frequencies of paragraph summaries

Auditors are less

independent

55 (32%) 10 (36%) 18 (35%) 26 (36%)

Independence is not

affected

60 (35%) 9 (32%) 16 (31%) 23 (32%)

Both articles are

summarized

57 (33%) 9 (32%) 18 (35%) 24 (33%)

Total 172 (100%) 28 (100%) 52 (100%) 73 (100%)

a Respondents in small firms reported up to 500 professional employees in their firms.

Those in large firms indicated over 500 professionals.b Sample sizes are reduced slightly in subsequent tables due to unanswered questions.

13

All tests in this and remaining tables are chi-square due to the nominal level of data, specifically these responses: yes, no,depends on circumstances, do not know, did not change answer, and changed answer. ANOVA or regression cannot be used; values

of 1, 2, etc. cannot be assigned to these responses because there is no ordinal, let alone interval or ratio, relationship among the

values. As a result we were unable to control for demographic variables such as years of experience in the tests; setting criteria for

demographic groups (e.g., less or greater than 10 years of experience) would be arbitrary and results in insufficient samples sizes

for chi-square tests. We recognize this as a limitation of the study.



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size is reported in Table 3, Panel A; 20% of small-firm practitioners and 9% of large-firm practitioners

changed their answers. The chi-square test yields a p value of .007, supporting H4. Again the results

are similar regarding audit specialization (H5, Panel B) and large-firm auditors compared to other

practitioners (H6, Panel C), with the lowest frequency of changed answers reported for large-firm

auditors (5%, Panel C). The chi-square p values for Panels B and C are both less than .05.

Table 4 breaks down changed opinions by version of the summary. A consistent change occurs

when an uncommitted answer, or an answer contrary to the study’s conclusion, changes to an answer

consistent with the conclusion. About half of changed opinions among small-firm non-auditors (15)

were consistent with the summary concluding that providing NAS impairs auditor independence; atotal of six other practitioners changed this way, including only one large-firm auditor. These results

appear to drive the differences shown in Table 3. This pattern is repeated for the summary finding that

independence is not impaired in that more (seven) small-firm non-auditors made consistent changes

than other (three) practitioners. Regarding the balanced summary of both articles, few changed an-

swers appeared (one or two each) for all groups except for small-firm non-auditors, who recorded

eight changed answers. Table 4 also indicates that four small-firm non-auditors, one large-firm

non-auditor, and one large-firm auditor changed answers in a fashion inconsistent with the summary

they read; uncommitted answers were changed to inconsistent answers, or answers consistent with

the study’s conclusion were changed to uncommitted or inconsistent answers. The chi-square tests

reported in Table 3 are not affected when deleting these inconsistent changes from the sample. 14

Table 2

Responses to first impairment question.

Panel A: Effect of firm size (chi-square p value = .000 a)

Is independence

impaired?

Small-firm auditors and non-auditors (n = 198) (%) Large-firm auditors and non-auditors

(n = 125) (%)

Yes 26 5

No 15 23

Depends on

circumstances

58 70

Do not know 1 2

Total 100 100

Panel B: Effect of audit specialization (chi-square p value = .000)

Is independence

impaired?

Non-auditors in small and large firms (n = 222) (%) Auditors in small and large firms

(n = 101) (%)

Yes 23 6

No 19 16

Depends on

circumstances

56 78

Do not know 2 1

Total 100 100

Panel C: Large-firm auditors versus all other practitioners (chi-square p value = .000)

Is independence

impaired?

Non-auditors in all firms and auditors in small firms

(n = 250) (%)

Auditors in large firms (n = 73) (%)

Yes 22 3

No 18 18

Depends on

circumstances

58 78

Do not know 2 1

Total 100 100

a For chi-square tests, both of the ‘‘do not know” cells have expected counts less than five. The p values are the same with the

‘‘do not know” row included or excluded from the tests.

14 Forty respondents answered either yes or no to the first question about impairing independence and received a summary

contrary to that opinion (of either Frankel et al. (2002) or Ashbaugh et al. (2003)), but these numbers are too small to conduct

hypothesis tests on this subsample.



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The second multiple-choice question asked what ratio of non-audit to total audit firm fees would

likely compromise an auditor’s independence; lower percentages indicate that NAS will likely impair

independence. Responses to the first time this question was asked appear in Table 5. The effect of firm

size is shown in Panel A; a higher percentage of small-firm practitioners (24%) selected the minimum

1–25% category, reporting strong beliefs that non-audit fees compromise independence, than the per-

centage of large-firm practitioners who did so (9%). The former group also indicated ‘‘do not know”

less often than the latter (33% versus 48%). The chi-square test of Panel A has a p value less than

.001, supporting H1.

Table 5, Panel B reports the effects of audit specialization on responses to the fees question. Re-

sponses of auditors again reflect less concern that provision of NAS compromise independence; for

example, 21% of non-auditors selected the 1–25% category, compared to 11% of auditors who chose

it. The chi-square p value for Panel B is .055, indicating marginal support for H2. Table 5, Panel C is

consistent with Panels A and B because large-firm auditors (the focus group) display less apprehension

about harmful effects of providing NAS than all other practitioners (the comparison group). The chi-

square test for Panel C is significant ( p = .027), supporting H3. The combined results of Table 5 are con-

sistent with the theory that control systems in large accounting firms encourage practitioners to state

positions consistent with their firms’ interests (Covaleski et al., 1998), as well as the theory that audi-

tors draw upon professional ethics as a source of power in relationships with clients (Goldman and

Barlev, 1974).

Table 6 reports changed answers to the non-audit fees question after reading the summary para-

graph. Fewer large-firm practitioners changed answers than small-firm practitioners (11% versus

20%, Panel A), fewer auditors changed than non-auditors (14% versus 18%, Panel B), and fewer

large-firm auditors changed answers compared to all other practitioners (14% versus 17%, Panel C).

However, the only significant difference was the firm-size effect (Panel A, p = .029), limiting support

to H4.15,16 This may be due in part to the response options for the fees question, which were quartiles

Table 3

Changes in answer to impairment question after reading summary paragraph percentages.

Panel A: Effect of firm size (chi-square p

value = .007)

Is independence + impaired? Small-firm auditors and non-auditors

(n = 192) (%)

Large-firm auditors and non-

auditors (n = 124) (%)Did not change answera 80 91

Changed answer 20 9

Total 100 100

Panel B: Effect of audit specialization (chi-square

p value = .021)

Is independence impaired? Non-auditors in large and small firms

(n = 215) (%)

Auditors in large and small

firms (n = 101) (%)

Did not change answer 81 92

Changed answer 19 8

Total 100 100

Panel C: Large-firm auditors versus all other

practitioners (chi-square p value = .006)

Is independence impaired? Non-auditors in all firms and auditorsin small firms (n = 243) (%)

Auditors in large firms(n = 73) (%)


Changed answer 19 5

Total 100 100

a Changed answers are defined as any change between yes, no, and uncommitted answers (depends or do not know).

15 The most common answer change for the fees question, 49% of the total changes (25 of 51),was from do not know to one of the

4% ranges.16 The questionnaire also included ten Likert scale questions asking for level of agreement that providing specific NAS (e.g.,

consulting, internal audit) reduces auditor independence. As with the two multiple-choice questions, these questions were asked

before and after the summary paragraph. Practitioner type did not generally affect responses – or changes in responses – to these

questions.



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(1–25% of total firm fees are non-audit fees, etc.). Respondents may not have been able to record changes

in their beliefs in these relatively wide ranges.

Table 4

Direction of changes in answer to impairment question.

Small-firm non-

auditors

Small-firm

auditors

Large-firm non-

auditors

Large-firm

auditors

Summary concludes independence is impaired

Consistent changea 15 2 3 1

Inconsistent change 2 0 0 0

Summary concludes independence not impaired

Consistent change 7 2 1 0

Inconsistent change 2 0 1 1

Summary of both articles

Change to impairmentb 2 0 2 2

Change from

impairment

6 1 0 0

Total changes 34 5 7 4

a A consistent change occurs when an uncommitted answer, or an answer contrary to the study’s conclusion, is changed to

an answer consistent with the conclusion. An inconsistent change occurs when an uncommitted answer is changed to an

inconsistent answer, or an answer consistent with the study’s conclusion is changed to an uncommitted or inconsistent

answer.b In this version two papers were summarized, one concluding that NAS may impair independence and the other that

independence is not impaired. ‘‘Change to impairment” means that an answer was changed from uncommitted, or that NAS do

not impair independence, to the opinion that NAS do impair independence. ‘‘Change from impairment” indicates a change in the

opposite direction.

Table 5

Responses to first non-audit fees question on percentage of fees that would likely compromise independence.

Panel A: Effect of firm size (chi-square p value = .000)

Small-firm auditors and non-auditors (n = 193) (%) Large-firm auditors andnon-auditors (n = 122) (%)

1–25% 24 9

26–50% 22 11

51–75% 14 21

76–100% 7 11

Do not know 33 48

Total 100 100

Panel B: Effect of audit specialization (chi-square p value = .055)

Non-auditors in small and large

firms (n = 216) (%)

Auditors in small and large

firms (n = 99) (%)

1–25% 21 11

26–50% 20 13

51–75% 15 22

76–100% 7 10

Do not know 37 43

Total 100 100

Panel C: Large-firm auditors versus all other practitioners (chi-square p value = .027)

Non-auditors in all firms and

auditors in small firms (n = 243) (%)

Auditors in large firms

(n = 72) (%)

1–25% 21 7

26–50% 20 14

51–75% 15 22

76–100% 8 8

Do not know 36 49

Total 100 100



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4.1. Additional analysis of written responses

At the end of the questionnaire in Part D, respondents were asked to explain why the summary par-agraph affected or did not affect their opinion about effects of accepting non-audit fess upon auditor

independence; 169 wrote responses, which are organized into six categories in Table 7. One-third (58)

wrote no informative answers, stating only that their opinions had not changed; the summary did not

affect them; or NAS’ affect on independence depends, without specifying upon what; but 60 disclosed

why NAS’ affects varies or stated their opinions on the topic. Many mentioned the amount of audit or

non-audit fees or the scope and type of NAS as causing the varying effects. Two responses referred

explicitly to the advantages of not allowing the audit team to perform NAS. Only one respondent sta-

ted ethics specifically (‘‘my ethical responsibilities keep me from being affected”), but another nine

discussed the role of integrity or punishment of ‘‘individuals who have hurt the profession,” consistent

with Goldman and Barlev’s (1974) thesis about the role of professional ethical standards.17 Appendix B

presents a synopsis of the written responses from Table 7.

Table 6

Changes in answer to non-audit fees question after reading summary paragraph.

Panel A: Effect of firm size (chi-square p

value = .029)

Small-firm auditors and non-auditors

(n = 187) (%)

Large-firm auditors and non-

auditors (n = 107) (%)Did not change answera 80 89

Changed answer 20 11

Total 100 100

Panel B: Effect of audit specialization (chi-square

p value = .453)

Non-auditors in small and large firms

(n = 209) (%)

Auditors in small and large

firms (n = 98) (%)



Total 100 100

Panel C: Large-firm auditors versus all other

practitioners (chi-square p value = .514)

Non-auditors in all firms and auditorsin SMALL firms (n = 236) (%)

Auditors in large firms(n = 71) (%)



Total 100 100

a Changed answers are defined as any change between any of the response categories: 1–25%, 26–50%, 51–75%, 76–100%, and

do not know.

Table 7

Classification of written responses regarding effects of the summary on opinions upon reading

the Frankel, Johnson, and Nelson or Ashbaugh, LaFond and Mayhew summaries.

Did not change opinion or said that summary did not affect it 48Said that effect of NAS depends, but did not specify upon what 10

Said it depends, and disclosed how they define ‘‘it depends” a 20

Stated beliefs about the effect of NAS on independence 40

Criticized the paper or summary of it 31

Miscellaneous 20

Total 169

a A synopsis of responses in this and the remaining three categories of Table 7 appears in

Appendix B.

17 As shown in Table 7, 31 respondents criticized the paper as summarized. Criticisms included that (1) they needed more

information about the 3000 sample firms; (2) earnings management could not be captured by the extent of discretionary accruals;

(3) a causal relationship was not proven; and (4) the research was biased.


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5. Conclusions

The SEC (2003b) received only two comment letters directly from accounting academics regard-

ing the auditor independence sections of the SOX: Geiger (December 12, 2002) and Kinney et al.

(January 7, 2003), both of which referred to their working papers on independence. Deloitte and

Touche’s January 7, 2003 comment letter cited Kinney’s paper (later published as Kinney et al.

(2004)) to support its position that the Act should not prohibit tax services. Kinney et al. (2004)

found that firms paying higher tax services fees experienced fewer financial restatements. Regarding

conflicts of interest resulting from employment relationships, Deloitte and Touche’s comment letter

agreed there should be support mechanisms, but argued that the scope of issuers’ employment rela-

tionships affected by the Act should be more restricted. However, unlike its discussion of tax ser-

vices and the Kinney et al. (2003) comment letter, in the case of employment relationships

Deloitte and Touche did not cite Geiger’s comment letter, which was filed almost a month earlier.

The related paper, later published as Geiger et al. (2005), found higher levels of discretionary accru-

als by firms that hired CFOs, VPs-Finance, and Controllers from their current auditor than firms hir-

ing from elsewhere.

This is precisely the differential treatment of research evidence by practitioners addressed in this

paper. There may not appear to be public policy consequences because both research papers had been

filed by their authors via comment letters, but normally unpublished and published research is not

entered directly into the public record by authors. It is much more common for public accounting

firms to comment on the state of research in general without citing specific studies. This is the ap-

proach seen below in the section of the Deloitte and Touche (2003, p. 20) comment letter dealing with

prohibitions on appraisal or valuation services.

There is no new evidence, research, or congressional finding that would serve as support for the

Commission now to eliminate those limited exceptions to the prohibition on appraisal and valua-

tion services that were carved out as part of the 2000 rulemaking.

Statements like this carry public policy consequences to the extent that policymakers rely upon

such assertions by accounting firms about research, including that done by academics. Our objective

is to show that these assertions are not necessarily due to practitioners’ passive ignorance of research;

active processes contribute to their publicly stated opinions. Large firms have lobbied against restrict-

ing provision of NAS to audit clients and have control systems that encourage their members to avow

this organizational imperative as their own (Covaleski et al., 1998). We thus predict and find that

large-firm practitioners are less likely to report beliefs that non-audit fees impair auditor indepen-

dence than practitioners in small firms. Large-firm practitioners are also less likely to report beliefs

that relatively lower ratios of non-audit to total fees are needed to compromise independence than

small-firm practitioners.Ethical standards are a source of power to help auditors resist client pressures (Goldman and Bar-

lev, 1974). Personal experience with such standards and firms’ procedural independence guidelines

should make auditors less likely to report beliefs that non-audit fees impair independence than

non-auditors. Results supported this hypothesis for two questions, one requesting an opinion about

impairment in general and the other a ratio of non-audit to total audit firm fees that would compro-

mise auditors’ independence. We also predicted that large-firm auditors are less likely to report beliefs

that non-audit fees impair independence than all other practitioners, because they experience large-

firm control systems (Covaleski et al., 1998) and perceive that professional ethics support them in

power relationships with audit clients (Goldman and Barlev, 1974). This hypothesis was supported

for both this and the fee ratio question.

We also examine belief persistence, the tendency to maintain prior positions when confronted withnew evidence, and claim that large-firm practitioners and auditors have the stronger motivations to

persevere in their beliefs than small-firm practitioners and non-auditors respectively. Practitioners

were asked to read such evidence in the form of summaries of papers concluding that provision of

NAS appeared to impair independence (Frankel et al., 2002), not to affect independence (Ashbaugh



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et al., 2003), or supporting either conclusion. Small-firm practitioners were comparatively receptive to

the summaries; 20% of them changed their responses to both the impairment question and the fee

question. Large-firm practitioners changed answers significantly less often, 9% of them for the impair-

ment question and 11% for the fee question. Changes in reported beliefs regarding both questions were

similar for auditors compared to non-auditors, and large-firm auditors (who have the strongest moti-

vations to persistently report the same beliefs) compared to all other practitioners.

Effects on public policy depend on the fluid nature of professional ethics and safeguards, regulation,

and the economy. Regarding ethics, the AICPA (2006) passed a principles-based conceptual framework

for independence standards that is consistent with the International Ethics Standards Board for

Accountants’ (IESBA) Code of Ethics for Professional Accountants (IFAC, 2007). The AICPA framework

calls upon practitioners to identify threats to auditor independence, such as the threat that an auditor

will advocate on a client’s behalf to the point of compromising objectivity. Public accounting firms

should respond with appropriate safeguards, including complaint systems that encourage employees,

clients and the public to report unethical behavior. Practitioners will need to adopt a new ethics mind-

set consistent with this threats-and-safeguards approach (Leibowitz and Reinstein, 2009), a process

that will likely take years to complete and may affect their reported opinions about threats to auditor

independence.With respect to increased regulation, to date the cascade effect of SOX has not been dramatic.

Gantt et al. (2007) analyzed legislation prohibiting provision of NAS to audit clients enacted in five

states and found that although state authorities may enact stricter rules than in SOX, only one state

(California) did so. Most states adopted a ‘‘wait and see attitude” regarding progress of federal leg-

islation (Gantt et al., 2007). However, with the downturn in the American economy in 2008 there is

growing support for greater regulation of the financial sector ( Jackson et al., 2008; Lueck, 2008;

Scannell et al., 2008). If a pro-regulation climate extends to the whole economy, it may trigger re-

newed interest in SOX-style restrictions at federal and state levels. In this climate incentives for

accounting firms and their professionals to maintain continuity in their reported beliefs, and treat

research accordingly, would increase. Academics wishing to serve the public interest better could

follow the example of Geiger (2002) and Kinney et al. (2003) and file their papers directly withthe authorities.

Acknowledgements

We are grateful for the input from Abe Akresh (Government Accountability Office), Michael Wright

(University of Calgary), Steve Moehrle (University of Missouri, St. Louis), Mohammad Abdolmoham-

madi (Bentley College), Brian Green (University of Michigan, Dearborn), Cathy Miller (Wayne State

University), Greg Trompeter (Boston College), Julia Higgs (Florida Atlantic University), Phil Reckers

(Arizona State University), Michael Grayson (Jackson State University), Kurt Pany (Arizona State Uni-

versity), Ed Swanson (Texas A & M University) and Benzie Barlev (Hebrew University).

Appendix A

A.1. Summary of Frankel et al. (2002)

A recent article in The Accounting Review finds that auditors are less independent when their clients

purchase more non-audit services. The article analyzed the ratio of non-audit to audit fees paid by a

sample of 3074 American firms. Clients paying higher such ratios might be able to exert more influ-

ence over their auditors, thus compromising auditor independence. Earnings management at these

firms, which refers to an optimistic bias in earnings, was measured as the amount of income-increas-ing accruals (over which management had some discretion to report in financial statements). The arti-

cle found that firms paying higher ratios of non-audit to audit fees tended to display greater earnings

management, indicating that auditors are less independent when their clients purchase a higher pro-

portion of non-audit services.



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A.2. Summary of Ashbaugh et al. (2003)

A recent article in The Accounting Review finds that the independence of auditors is unaffected

when their clients purchase more non-audit services. The article analyzed the ratio of non-audit to

audit fees paid by a sample of 3170 American firms. Clients paying higher such ratios might be able

to exert more influence over their auditors, thus compromising auditor independence. Earnings man-

agement at these firms, which refers to an optimistic bias in earnings, was measured as the amount of

income-increasing accruals (over which management had some discretion to report in financial state-

ments). The article found no relationship between the ratio of non-audit to audit fees and earnings

management, indicating that auditors are not less independent when their clients purchase a higher

proportion of non-audit services.

A.3. Summary of both Frankel et al. (2002) and Ashbaugh et al. (2003)

Two recent articles in The Accounting Review examined the effect of non-audit services on auditor

independence. Both articles analyzed the ratio of non-audit to audit fees paid by samples of about

3000 American firms. Clients paying higher such ratios might be able to exert more influence overtheir auditors, thus compromising auditor independence. Earnings management at these firms, which

refers to an optimistic bias in earnings, was measured in both articles as the amount of income-

increasing accruals (over which management had some discretion to report in financial statements).

One article found that firms paying higher ratios of non-audit to audit fees tended to display greater

earnings management, indicating that auditors are less independent when their clients purchase a

higher proportion of non-audit services. The other article found no relationship between audit fee ra-

tios and earnings management, indicating that auditors are not less independent when their clients

purchase a higher proportion of non-audit services. The difference in the results of the two papers

is due to the fact that one of them adjusted for firm performance in the statistical analysis.

Appendix B. Synopsis of written comments

In Table 7, 20 respondents said the effect of NAS on independence depends, and disclosed how they

define ‘‘it depends.” Following is a synopsis of their comments.

1. Depends on scope of services provided.2. It is harder to be independent when the client provides a lot of revenue.3. NAS affect independence, except for tax services.4. Depends on the mindset of the engagement team – willing to take firm stances in spite of

consequences.5. There can be an effect on judgments when client fee base is higher on both audit and non-audit

fees.

6. On judgmental items, whether more liberal interpretations are allowed versus a more stringentanswer.

7. It depends on who performs services – audit team or other professionals.8. Depends on integrity of auditors regardless of NAS.9. NAS affect independence but question is where do NAS become material enough to affect inde-

pendence. Also, outsourcing NAS to other accounting firms also affects independence if non-

audit firm depends on audit firm economically.10. Ratio of non-audit fees to audit fees matters less than ratio of total client fees to total fees of

partner, office, or firm.11. Depends on type of NAS and total fees collected from client (does not specify NAS).12. NAS can affect independence when fees are a significant portion of total fees.13. Depends on whether audit team members perform the NAS.

14. If NAS relate to numbers that we audit, independence may be impacted.15. Services that affect independence are numbers 4, 5, 9, and 10 on the Likert scale questions.16. Independence would be impaired if auditors perform any kind of management function at the

client.17. Realistically, fees are difficult to separate from scope of audit and client relationship overall.



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18. Depends on circumstances, including the size of the firm (but does not say whether it’s the size

of the client or the accounting firm).19. It’s the nature of NAS that matters (but was not more specific).20. Consulting fees impair auditor independence.

In Table 7, 40 respondents stated their beliefs about the effect of NAS on independence. Most sim-ply said that NAS fees either do or do not affect independence. Following are eight comments with

additional content.

1. If management is predisposed to manage earnings, will likely distance itself from auditors rather

than engage for additional services.2. If the public perceives (or believes) auditor independence is impaired then it is. If studies can show

that EM is not related to the amount of non-audit fees, it should be proliferated not just in The

Accounting Review but plastered across billboards, newspapers, and TV broadcasts – so the public

perception can be in line with what actually occurs related to auditor independence from clients.3. AICPA should not let definition of independence be defined by the reasonable investor community.4. Even if not material to the audit firm NAS fees will affect individual partner compensation.

5. Companies spending on NAS tend to be aggressive and cutting edge and will seek earnings man-agement regardless of who performed the NAS, audit or non-audit firm.

6. CPA’s believe themselves independent but do not hold to a higher standard. They are not intention-

ally deceptive.7. If auditor has integrity fees do not matter.8. Weed out individuals who have hurt the profession.

In Table 7, 31 respondents criticized the article(s) and/or the summary. Many comments were gen-

eral, stating for example that the study was flawed. Following are 10 specific comments.

1. A causal relationship was not proven.2. Earnings management cannot be captured by the extent of discretionary accruals.

3. More information about the 3000 sample firms was needed.4. Hard to believe paragraph was unbiased.5. The summary is an academic analysis that ignores the human element.6. TAR is an ivory tower publication with no relevance.7. Did not believe the study or results measure independence.8. Could not tell how the study measured income-increasing accruals.9. You cannot detect a weak auditor by studying accrual accounts.

10. Larger companies have more discretionary dollars to spend. Larger companies have more dis-

cretion in financial reporting. Therefore, overall conclusion of author is flawed.

In Table 7, 20 respondents are classified as miscellaneous. Some of them repeated portions of the

summary. Some described their work or business, e.g., ‘‘I work for smaller businesses that need NAS”

or ‘‘I do not do audits.”

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Documents

1. Beaulieu P. Dan a. Reinstein_Belief Perseverance