The Association of Audit and Nonaudit Services Fees Between SEC and Non-SEC Investigated Firms

Abstract

The purpose of this study is to explore the association of audit and nonaudit services fees of firms under SEC investigation relative to firms not under SEC investigation to ascertain whether systematic differences exist. This study is important because the issue of auditor independence raises concerns about auditor objectivity and economic bonding stemming from increasing nonaudit service fees. As gatekeepers to the public securities markets, it is important that the opinion of independent auditors provides investors with needed assurance that the financial statements of a company can be relied upon. If nonaudit fees can proxy for potential independence impairment, then a significant association between these fees and an SEC investigation may suggest that the SEC perceives firms purchasing large amounts of nonaudit services possibly lacking in independence. In OLS regression models of audit and nonaudit fees, an SEC investigation variable is significant indicating higher fees relating to an SEC investigation. Nevertheless, in a logistic regression model of SEC investigated firms audit fees is significant, but nonaudit fees is not after controlling for audit fees. This result suggests that the level of nonaudit service fees alone is not a determinant of the likelihood of an SEC investigation. Further discussion of this and other findings are provided.