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Board Interlocks and the Purchase of Non-Audit Services from the Auditor

Sat, January 18, 1:45 to 3:15pm, TBA

Abstract

This study investigates whether firms sharing common directors exhibit similar patterns of non-audit service purchases (NAS). The academic literature and the investing world including regulators have been concerned that NAS compromise auditor independence, which led to the prohibition of auditors to provide many types of NAS by Sarbanes-Oxley Act (SOX). We find that board interlocks are positively associated with greater NAS in all three categories, audit-related, tax-related and all others, after controlling for other determinants of NAS. While NAS decreases dramatically after SOX, the positive relation between board interlocks and NAS remains significant post-SOX. Using the estimated NAS regression on board interlocks and control variables, we separate NAS into a component affected by board interlocks versus a component derived from the control variables and residual in the regression. We find that the board interlock NAS component explains more of the variation in earnings management measures than the other component.

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