Non-Audit Service Fees, Auditor Characteristics and Earnings Restatements

The objective of the study is to provide empirical evidence of the impact of non-audit services (NAS) as well as other auditor characteristics on auditor independence by testing the relationship of NAS fees to the occurrence of financial statement restatements. The authors tested whether firms that restate their financial statements have higher levels of total service fees or higher levels of NAS fees than non-restatement firms. The testing also includes an examination of the relationship between the audit firm size and the audit firm industry specialization to financial statement restatements. The study found only limited evidence to support the concept that firms with higher NAS fees are more likely to restate earnings. The study did find stronger evidence that the level of total fees paid to the audit firm is significant in the predictability of a restatement. Results demonstrate the necessity of regulations concerning NAS and conflict of interest.