The Relationship between Non-audit Services and Real Earnings Management: Evidence on Auditor Independence

Abstract

I examine the relationship between non-audit services fee ratio and auditor independence by considering not only accounting earnings management (AEM) but also real earnings management (REM). I examine a sample of US firms covering 2000 to 2012 and find that, while non-audit fee ratio has no relationship with AEM, corroborating prior studies, it does have a positive relationship with REM, suggesting the impairment of auditor independence. This positive relationship is weaker in B4 firms and in the post-SOX period, suggesting that high-quality auditors and a strong legal regime can mitigate REM.