Review of Accounting Studies

, Volume 18, Issue 1, pp 1–33 | Cite as

Non-audit services and financial reporting quality: evidence from 1978 to 1980

  • Kevin Koh
  • Shiva Rajgopal
  • Suraj Srinivasan


We provide evidence on the long-standing concern about the potential conflicts of interest of auditors that provide clients with non-audit services using rarely explored non-audit services fee data from 1978 to 1980. In this setting, we find evidence of improved earnings quality when auditors provide non-audit services, especially those related to information services. This is consistent with better audit quality resulting from knowledge spillovers in the joint offering of audit and consulting services. Events related to the 1982 repeal of mandatory non-audit services disclosures are associated with a small positive stock price reaction, suggesting that the disclosure repeal has no adverse economic consequences. Furthermore, following the repeal we find no change in the earnings quality of client firms. In sum, our data suggest that non-audit services offered by audit firms can be associated with improved audit and reporting quality in client firms via auditors’ reputational incentives, synergies, and knowledge transfers.


Non-audit services Audit quality Auditor independence Audit fees Earnings management Earnings quality 

JEL Classification

K22 G18 G28 G34 M40 M41 M49 



We thank our respective schools for financial support. We thank an anonymous referee, Peter Easton (editor), Ray Ball, Phil Berger, Mark DeFond, Aiyesha Dey, Bill Kinney, Doug Skinner, Hun-Tong Tan, and workshop participants at Nanyang Technological University, the International Symposium on Audit Research conference at the University of Southern California, the 2008 American Accounting Association annual meeting, and the 2009 European Accounting Association Annual Congress for helpful comments. We are grateful to the staff at the University of Chicago Regenstein Library, Northwestern University Library, and the Chicago Public Library (Main Branch) for assisting in the use of their microfiche collections of proxy statements. We thank Mark Maffet for his excellent research assistance.


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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Nanyang Technological UniversitySingaporeSingapore
  2. 2.Goizueta Business SchoolEmory UniversityAtlantaUSA
  3. 3.Harvard Business SchoolBostonUSA

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