Corporate Governance, the Extent of Non-Audit Services and Auditor Independence: Evidence from Firms Issuing Financing

Abstract

This paper studies the impact of non-audit services on auditor independence by considering whether effective corporate governance constrains the extent of non-audit services purchased from the incumbent auditors when firms are issuing financing. Using 8,517 observations from 2002 to 2006, we find that the greater the effectiveness of a firm's corporate governance the lower the extent to which non-audit services are purchased from the incumbent auditors when firms issue equity. This result implies that the independence of auditors of firms issuing equity may be detrimentally affected by the non-audit services when effective corporate governance is absent. However, the effectiveness of corporate governance has no impact on the extent to which non-audit services are purchased from the incumbent auditor when firms are issuing debt. We interpret this finding as evidence that lenders can protect themselves through their own monitoring and constraining of the borrowing firms' actions. Hence, monitoring activities of lenders appear to substitute for corporate governance practices to help auditors maintain their independence.