Investments in Auditor-Provided Non-Audit Services and Future Operating Performance

Abstract

SUMMARY The “organization capital” of a firm consists of its internal investments in its business units, processes, know-how, employee skills, and information systems. We investigate whether a firm's investments in auditor-provided non-audit services (NAS) can supplement its own internal investment in organization capital, resulting in improved operating performance. We find that investments in NAS are positively related to a firm's subsequent operating performance consistent with NAS augmenting a firm's organization capital. Firms with low organization capital in general, high complexity, or disruption due to acquisitions benefit the most from purchasing NAS from their auditor. We also show that firms engaging auditors with a high level of expertise manifest higher levels of future operating performance. We find no evidence that the improvement in operating performance subsequent to NAS investment is due to earnings management or lower audit quality. JEL Classifications: M41; M49; L84.