Audit Fees

Auditor Independence and Earnings’ Quality: Evidence for ∗Market Discipline vs. Proscriptive Regulation James Brown Montana State University Dino Falaschetti Montana State University Michael Orlando Federal Reserve Bank of Kansas City September 1, 2006 Abstract Received research largely argues against auditor independence influencing the quality of earnings’ reports, but encounters several difficulties in doing so. Addressing these difficulties, we build additional confidence that auditor independence improves earnings’ quality, though any such effect appears to be small. Moreover, our research facilitates a more careful inference from audit fee data about the efficacy of Sarbanes-Oxley’s restriction on consulting for audit clients. Here, we develop more defensible evidence that moving past the Securities and Exchange Commission’s (SEC’s) fee disclosure mandates to proscribe non-audit services diminished financial market opportunities. JEL: G14, G38, K22, M42 Keywords: Auditor Independence, Audit Fees, Non-Audit Services, Corporate Governance, Sarbanes-Oxley ∗ We thank Dan Covitz, Rob Fleck, Steven Hansen, Andy Hanssen, Mary Sullivan, Doug Young, participants at the 2006 meeting of the Washington Area Finance Association at George Washington stUniversity (WAFA) and the 81 Annual Conference of the Western Economic Association (WEA), and seminar audiences at Montana State University for helping us think about this ...