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Prior to the Sarbanes–Oxley Act of 2002, audit partners experienced economic pressure to grow revenue from the sale of nonaudit services to their audit clients. To an auditor who is highly rewarded for revenue generation and growth, nonaudit services may represent a particularly strengthened economic bond with the client. Prior research shows that, in general, nonaudit service fees received in the current period do not impair audit quality. We examine a different setting. We propose that auditor independence can become impaired, and audit quality compromised, when clients that currently purchase relatively low amounts of nonaudit services, increase their purchases of nonaudit services from the auditor in the subsequent period. We test our prediction in the context of earnings management as a proxy for audit quality, measured by (a) performance‐adjusted discretionary accruals and (b) classification shifting of core expenses. Our results indicate that prior to the Sarbanes‐Oxley Act, rewards to the auditor in the form of future additional nonaudit service fees from current‐year high fee‐growth‐opportunity clients adversely affects audit quality. This effect is particularly strong among companies with powerful incentives to manage earnings. Our findings indicate that regulators should consider the multiperiod nature of the client–auditor relationship when contemplating policies that restrict nonaudit services, as well as the overall environment in which audit partners operate. This might include partner compensation arrangements that put pressure on audit partners to focus on increasing revenue at the expense of audit quality.
Table S7. Abnormal net hiring and future performance Table S8. The moderating role of unionized labor Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.
Extant literature on professional services firms in general, and on the Big Four accounting firms in particular, consistently shows that these firms are in a state of institutional flux.In turn, it has been argued that new types of professionals are emerging within this context.Adopting a sociological perspective inspired by the work of Pierre Bourdieu (1930Bourdieu ( -2002) ) this article unpicks the meaning of success within the Big Four via an exploration of who makes partner.Specifically, the paper reports upon a qualitative study undertaken with partners and other senior accountants in three Big Four firms between December 2010 and September 2012.The findings of the study are four-fold: firstly, it is shown that, although Big Four partners might be thought of as belonging to the upper echelons of society, making partner is open to individuals from modest family backgrounds; secondly, partners draw sharp distinctions between themselves and those just below partner level in terms of what each is capable of, implying that different types of professional exist at different levels within the Big Four; thirdly, partners embody entrepreneurialism and a concern for revenue generation more than they embody technical expertise; and, fourthly, the requirements for making partner today are different from the criteria that previous generations of partners were subject to.Finally, a key insight of this paper is that the central distinguishing features of successful professionals in the Big Four are tied to commercialism.
Table S9. Alternate control groups. Table S10. Different time horizons. Table S11. Subsample analyses. Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.
We evaluate whether, and under what circumstances, corporate tax aggressiveness influences audit pricing. Using a compound measure of two long-run effective tax rates, we find that tax-aggressive firms pay higher fees for external audit services after controlling for factors related to earnings management. The fee premium increases with management’s uncertainty about the sustainability of tax positions if audited by tax authorities (i.e., disclosed tax reserves). Further, the provision of auditor-provided tax services may create knowledge spillovers that alleviate the fee premium for tax aggressiveness, unless tax uncertainty is high. Finally, an accounting firm’s industry expertise in auditing is associated with higher audit fees independent of tax aggressiveness, whereas industry expertise in taxation leads to a fee premium only for tax-aggressive clients. Overall, the evidence implies firms’ aggressive tax behavior, tax services provider, and auditor expertise interact to influence the pricing of audit engagements.
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American Economic Review2014104(5), 132-135open access
Comprehensive data on consumption expenditures have historically not been collected in US longitudinal household surveys. The Panel Study of Income Dynamics (PSID) expanded its expenditure data collection in 1999 and 2005. We examine these new expenditure data, highlighting several unique features of the PSID data. We then compare the PSID expenditure data with those in the Consumer Expenditure Survey (CE). We document that the PSID data cover nearly the entire scope of the CE data, and the mean statistics of total expenditures compare favorably between the two surveys. However, significant differences remain for certain expenditure categories.