Non-Audit Services and the Timeliness and Reliability of Earnings Announcements.

• In Event: Non-Audit Services, Audit Timing

Abstract

This paper examines the association between non-audit services (NAS) and the timeliness and reliability of earnings announcements. While most companies release earnings before the audit is complete to provide timely information to the market, earnings announcements issued before audit completion are less reliable. If NAS generate knowledge spillovers that improve audit efficiency, firms that purchase NAS will be able to satisfy the market’s demand for timely information without sacrificing the information’s reliability. We find tax NAS are associated with shorter earnings announcement lags, more complete audits at the earnings announcement, and lower likelihood of an earnings revision, consistent with tax NAS increasing audit efficiency. In subsequent analyses, we do not observe significant associations between tax NAS and discretionary accruals or misstatements, indicating our main findings are not due to impaired independence. Our results provide evidence of a positive externality with important capital market implications arising from tax NAS.

Authors

• Chris E Hogan, Michigan State University

• Michelle L Nessa, Michigan State University

• Joseph H Schroeder, Indiana University - Bloomington