Auditor Fees and Auditor Independence

Auditor Fees and Auditor Independence:

Evidence from Going Concern Reporting Decisions

by

Marshall A. Geiger*

University of Richmond

and

Allen D. Blay

Florida State University

*Contact Author:

University of Richmond

1 Gateway Road, Richmond, VA 23173

mgeiger@richmond.edu

804-287-1923

1

Electronic copy available at: http://ssrn.com/abstract=1943124

ABSTRACT: In this study we examine the association between audit service fees and non-audit

service (NAS) fees and the auditor’s final decision regarding the type of opinion to render to a

financially distressed client. Along with examining current fee levels and reporting decisions we also

test the DeAngelo (1981) auditor independence model by examining the association between future fee

receipts and current reporting decisions. Using data from the post-SOX reporting period of 2004-2006

and a stringent control sample, we find that the magnitude of NAS fees received in the current year is

negatively related to the likelihood of the auditor modifying the audit opinion for going-concern

uncertainty. We also find that current going-concern modification decisions are negatively related to

total fees received by auditors in subsequent years. Our findings suggest that concerns over the relation

between auditor fees and the possible impairment of auditor independence, as reflected in going-concern

modification decisions, are supported in the more recent years for highly distressed clients.

2

Electronic copy available at: http://ssrn.com/abstract=1943124

Auditor Fees and Auditor Independence:

Evidence from Going Concern Reporting Decisions

1. Introduction

“Independence is the cornerstone of the accounting profession and one of its most precious

assets.” Robert Mednick, Chair, American Institute of Certified Public Accountants (AICPA)

Board of Directors, 1997.

Without independence there is no need for external auditors attesting to the purported accuracy and

completeness of...