Pricing on Andersen's FIS and internal audit services by successor auditors

Abstract

PurposeTo examine whether or not new auditors of former Andersen clients perceive prohibited non‐audit services from Andersen as a business risk indicator and, therefore, adjust for the effects of this important risk factor in their audit pricing.Design/methodology/approachUtilizing a significant number of involuntary auditor switches in the US as a result of the collapse of Andersen in late 2002, this study uses regression analyses to examine the hypothesized associations between two types of non‐audit services and successor auditors' audit pricing.FindingsThis study finds that the provision of financial information systems (FIS) design and implementation services and internal audit outsourcing services are positively associated with audit fees charged by successor auditors. This study supports the recent prohibition on the provision of FIS and internal audit services mandated by the Sarbanes‐Oxley Act of 2002.Originality/valueThis study adds to the recent body of work on the association between the provision of certain non‐audit services and the predecessor auditor independence or audit quality perceived by the successor auditor and provides valuable information for policy makers.