A number of recent studies examine whether the joint provision of audit and nonaudit services (NAS) impairs auditor independence, and yield mixed results. We examine whether investors perceive auditor independence as being impaired when auditors supply nonaudit services, by investigating the association between fee-based measures of nonaudit service purchases and the earnings response coefficient (ERC). We find that the nonaudit fee ratio and the level of nonaudit fees were negatively associated with ERCs in 2001. When we use unexpected fees (a measure of over- or underpayment of nonaudit fees), we find a negative association between NAS purchases and ERC, but this occurs mainly in the second and third quarters following the release of the proxy. Further investigation reveals that the quarterly differences may be driven by the increasing flow of information (i.e., the first-time disclosures of fees and media analyses of these disclosures) that became available to investors during our sample period. We speculate that, during the course of the year 2001, the increase in information allowed investors to engage in better comparative analyses of the fee disclosures. We interpret our results as indicating that investors did perceive NAS as impairing auditor independence.

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SUMMARY The primary issue we examine is whether PCAOB-identified audit deficiencies are associated with a change in triennially inspected audit firms' going-concern (GC) reporting decisions for their financially distressed clients. Our analysis generally indicates that firms with PCAOB deficiencies were more likely to issue a GC opinion for financially distressed clients subsequent to their PCAOB inspection than prior to their inspection. We also examine the same issue for audit firms with a PCAOB inspection report indicating no audit deficiencies. For these firms, our results provide only limited evidence of a change in the likelihood of issuing a GC opinion, with audit firms becoming more conservative (i.e., greater likelihood of issuing a GC opinion).

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