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    Do Investors’ Perceptions Vary with Types of Nonaudit F...
    research summary posted April 13, 2012 by The Auditing Section, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 04.01 Scope of Services, 04.02 Impact of Fees on Decisions by Auditors & Management, 04.03 Non-Audit Services, 04.08 Impact of SEC Rules Changes/SarbOx 
    Do Investors’ Perceptions Vary with Types of Nonaudit Fees? Evidence from Auditor Ratification Voting
    Practical Implications:

    This paper added to the discussion on what types of services audit firms should and should not provide to their audit clients. The evidence in this paper supports the view that investors do not view tax services provided to audit clients in the same light as audit-related services.  The findings of this study are relevant to managers and boards of directors who purchase non-audit services (audit-related, tax or other) from the external auditor.  This study is also useful to practicing auditors to address audit committee concerns on non-audit services.


    Mishra, S., K. Raghunandan, and D.V. Rama. 2005. Do Investors’ Perceptions Vary with Types of Nonaudit Fees? Evidence from Auditor Ratification Voting. Auditing: A Journal of Practice & Theory 24 (2): 9-25.

    audit fees; audit committees
    Purpose of the Study:

    Beginning in 2001, the Securities and Exchange Commission (SEC) required registrants to disclose fees paid to auditors in the following categories: audit, financial information system design and implementation (FISDI), and other fees.  In 2003 the SEC updated the disclosure requirements by adding two new fee categories: tax fees and audit-related fees (which were previously reported in “other fees”) and eliminating FISDI, based on the prohibition of these services by the Sarbanes-Oxley Act.  The SEC  suggested the expanded disclosure would provide better information for investors to determine for themselves if auditor ndependence is impaired as a result of non-audit services provided and the nature of fee arrangements.            

    The SEC asserted that investors and financial statement users would view audit-related and tax fees more favorably than “other” fees.  The authors test this assertion by examining the relation between shareholder auditor ratification votes and ratios of audit-related, tax, and other fees to audit fees.  If investors view audit-related and tax fees differently than other non-audit fees then the authors expect auditor ratification voting to vary by fee ratio.      

    Design/Method/ Approach:

    Using firms in the S&P 1500 the authors select a sample of 248 firms that submit auditor ratification for shareholder vote during 2003.  The authors then gather the results of the ratification votes for these firms from the subsequent Form 10-Q or 10-K filings. The authors also gather company financial information from various public sources and evaluate the impact of fee ratios on the outcome of shareholder ratification votes.

    • Shareholders voting against auditor ratification increased substantially from 2001 to 2002 to 2003.  The authors posit that this result is largely driven by Andersen’s failures and Enron’s demise. As expected, other fees impact shareholder ratification votes unfavorably.
    • Tax fees impact shareholder ratification votes unfavorably; which is contrary to the SEC assertion that investors view these tax fees favorably.  However, this supports the PCAOB’s actions in 2005 relating to restricting some auditor-provided tax services.
    • Audit-related fees are viewed favorably by investors, which is consistent with the SEC’s assertion and opposite of the result of tax fees.
    • Overall, the results support the SEC assertion of a need for separate categories of non-audit fees (audit-related, tax and other) as shareholder voting on auditor ratification appears to be influenced by these non-audit fees. 
    Standard Setting, Auditor Selection and Auditor Changes
    Impact of SOX, Scope of Services, Impact of Fees on Decisions by Auditors & Managmeent, Non-audit Services, Impact of SEC Rules Changes/SarBox
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