Auditor Independence and Fair Value Accounting : An Examination of Non-Audit Fees and Goodwill Impairments

Inadequate testing of fair value accounting estimates, including goodwill, is often cited as an audit deficiency in PCAOB inspection reports, and, in some cases, these deficiencies have led to enforcement actions against the auditor. As a result of these issues, the PCAOB recently proposed a new auditing standard for fair value accounting. While these regulatory actions suggest that auditors are challenged by the fair value regime of accounting for goodwill, they also highlight an area where the auditor could be influenced by their financial ties to a client. In this study, we test whether non-audit fees are associated with goodwill impairment decision outcomes. 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 the negative relation between non-audit fees and auditor independence is driven by clients who are most incentivized to exert their influence over the auditor