Financial Accounting Blog

Tuesday, March 23, 2004

Restatements and Audit Fees. Sarbanes-Oxley made it illegal for accounting firms to provide both auditing services and consulting services to the same company. The lawmakers' concern was that auditors may be reluctant to question management's accounting for risk of losing the lucrative consulting jobs. If these arrangements led to subpar audits, then perhaps we'd see a connection between non-audit fees and companies having to restate their financial statements. Yet, a recent study found this was not the case...
In comparing companies that restated their financials with matched controls that did not, the authors found no correlation between restating financials and paying nonaudit fees. Neither the volume of nonaudit fees, nor the ratio of audit-to-nonaudit fees, nor the total of all fees paid to the auditor by the company shows any relationship to restating financial reports.