Perceived Auditor Independence and Audit Litigation: The Role of Nonaudit Services Fees

TLDR

The study examines whether audit litigants believe that nonaudit services fees signal impaired auditor independence and influence juror perception. The authors analyze 2001–2007 GAAP restatements, linking the amount of nonaudit services fees and their proportion of total fees to the probability of audit litigation. They find that higher nonaudit services fees and a higher fee ratio increase the likelihood of audit litigation, and when plaintiffs cite these fees as evidence of impaired independence, settlements are more likely and larger, suggesting litigants view such fees as strengthening the case against auditors. All data used are publicly available from the sources identified in the study.

Abstract

ABSTRACT This study investigates whether audit litigants act as if they believe jurors will associate auditor-provided nonaudit services (NAS) with impaired auditor independence, and thus substandard auditor performance. Using GAAP-based financial statement restatements disclosed from 2001–2007 as an indicator for audit failure, I find that the amount of NAS fees and the ratio of NAS fees to total fees is positively associated with the likelihood that a restatement results in audit litigation. I also find that when plaintiff attorneys argue that auditor independence was impaired due to dependence on client fees and, in particular, NAS fees, restatement-related audit litigation is more likely to result in an auditor settlement and a larger amount of settlement. These results suggest that audit litigants act as if they believe NAS fees will strengthen the case against the auditor, and thus affect the court resolution if the lawsuit is taken to verdict. Data Availability: All data are publicly available from sources identified in the study.