Auditor Independence and the Likelihood of a GAAP Violation

This paper examines whether auditor independence is compromised resulting in poor quality audit when auditors provide substantial non-audit services to their clients. Prior studies have used abnormal discretionary accruals, financial restatements, the likelihood of issuing a qualified opinion, or meeting/beating market earnings expectation as proxies for poor audit quality. The findings of these studies have been mixed and can be attributed, in part, to the inherent noise in the proxies for audit quality. This study examines the question of auditor independence by using the likelihood that a firm will violate GAAP (Beneish, 1999) as a proxy for audit quality. The finding of this study is that Fortuneiquest; 500 firms, whose auditors provide substantial non-audit services, tend to have a higher propensity to violate GAAP. These finding have policy implications for regulators considering making changes in the current regulations on outsourcing of non-audit services to independent auditors