Do Non-Audit Fees Impair Auditor Independence? Using Goodwill Accounting to Help Reconcile the Debate

Abstract

Prior literature’s inability to document an empirical relation between non-audit service fees and compromised auditor independence contradicts the significant and long-standing concerns expressed by regulators and the investing community. In this paper, we examine whether currently permissible non-audit services pose a threat to auditor independence using a measure – goodwill impairments – that reduces many of the potential limitations that could have prevented prior research from documenting evidence to support the proposed negative association. Our results indicate that the non-audit fees a client pays are inversely related to the likelihood of impairment in settings where goodwill is likely to be impaired. Additional examinations suggest that higher levels of non-audit fees are also associated with lower impairment amounts and a longer time lag until impairment occurs. Taken together, our findings suggest that the understanding of how non-audit services impact auditor independence may not be as complete as many believe.