The Effects of Recurring and Nonrecurring Tax, Audit-Related, and Other Nonaudit Services on Auditor Independence

Our study investigates the relationship between auditor-provided nonaudit services (NAS) and financial restatements. We extend previous research by distinguishing recurring and nonrecurring NAS when examining the association between NAS and restatements. We make the distinction between recurring and nonrecurring engagements for each of the three types of NAS: tax, audit related, and other. Our results indicate that recurring tax services are the only NAS negatively associated with restatements. This negative association is consistent with recurring tax services providing auditors with knowledge spillovers that improve audit quality. In contrast, we find a positive association between nonrecurring tax NAS and restatements, suggesting they have a net detrimental effect on auditor independence. We consider our results for recurring and nonrecurring tax NAS to be supportive of the Public Company Accounting Oversight Board's decision to continue allowing auditors to jointly provide annual tax compliance services while prohibiting auditors from jointly providing certain tax consulting services. Among audit-related and other NAS, we find positive associations between fees and restatements regardless of whether the engagement is recurring or nonrecurring. The positive association is significantly larger for nonrecurring audit-related NAS than recurring audit-related NAS. These results show that it is important to distinguish not only recurring and nonrecurring tax engagements, but also recurring and nonrecurring audit-related engagements. In both cases, tax and audit-related services, we find that nonrecurring NAS are associated with higher probabilities of restatement and greater threats to auditor independence than their recurring counterparts.