Nonaudit services and financial restatements: Evidence from Chinese listed companies

Abstract

Based on the data of A share listed companies that ever clearly disclosed audit and nonaudit fees in annual report from 2004 to 2007, this paper investigates the association between nonaudit services and audit quality using financial restatements as the proxy of audit quality. Empirical evidence shows that audit fees, nonaudit fees and total fees will not make companies restate financial reports, but nonaudit fees ratio increase the companies' propensity to restate financial statements. Offering nonaudit services may make auditors ignore the quality of financial reports and help companies manage earning, Which make restatements become easy. So it provides support for the nonaudit service impairing audit quality. Regulators should strenghen management and supervision, and emphasize the responsibility of external auditors.