Belief perseverance amonregarding the effect of noindependence

Philip Beaulieu a,1, Alan ReinsteaHaskayne School of Business, University of Calgary,b School of Business Administration, Wayne State Uni

a r t i c l e i n f o

Article history:

ger proportions than for large-rm practitioners (9%) and auditors(8%). Results generally support our hypotheses and suggest that asevidence regarding the effectiveness of key provisions of theSarbanesOxley Act of 2002 emerges, accounting practitioners willmaintain their beliefs, but react differently depending upon their

* Corresponding author. Tel.: +1 313 577 4530/248 368 8841/248 420 1522; fax: +1 248 368 8950.E-mail addresses: reinstein@wayne.edu, a.reinstein1@comcast.net (P. Beaulieu), pbeaulie@ucalgary.ca (A. Reinstein).

1 Tel.: +1 403 220 7304; fax: +1 403 210 2217.

J. Account. Public Policy 29 (2010) 353373

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J. Account. Public Policy

journal homepage:0278-4254/$ - see front matter 2010 Elsevier Inc. All rights reserved.tors. We investigate also belief perseverance whether practitio-ners tend to maintain prior reported beliefs after readingresearch on the relationship between NAS and auditor indepen-dence.Practitioners reported their beliefs before and after reading a

summary of Frankel et al. (2002) indicating that providing NASmay impair independence; Ashbaugh et al. (2003) suggesting thatindependence is not impaired; or a summary of both ndings.Twenty-six percent of small-rm practitioners and 23% of non-auditors reported prior beliefs that NAS impair independence,much larger proportions than for large-rm practitioners (5%)and auditors (6%). After reading the summary 20% of small-rmpractitioners and 19% of non-auditors changed their answers, lar-doi:10.1016/j.jaccpubpol.2010.06.005g accounting practitionersn-audit services on auditor

in b,*

Canadaversity, Detroit, MI 48202-3930, USA

a b s t r a c t

We hypothesize, based on management control processes in largerms (Covaleski et al., 1998), that large-rm practitioners will beless likely than small-rm auditors to report beliefs that non-auditservices (NAS) impair auditor independence. Based on Goldmanand Barlevs (1974) analysis of auditor-rm conict of interestsand procedural independence safeguards, we also predict thatauditors will report less concern over impairment than non-audi-

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publications, which non-academic audiences may not perceive as relevant (Tuttle and Dillard,2007). We analyze non-academics reported beliefs both before and after reading about new research,to understand better the process by whicpers from outside the belief revision literais Covaleski et al.s (1998) ethnographic shypothesize that large-rm control systetionship between NAS and auditor indeph the research affects policy. We rely upon two seminal pa-ture to channel the discussion in this new direction; the rsttudy of management control in Big Six accounting rms. Wems lead practitioners to report less concern about the rela-specializations and rm afliations. This will affect public policy tothe extent that accountants and auditors, rather than academics,report research ndings to regulators.

2010 Elsevier Inc. All rights reserved.

1. Introduction

The following statement about the effects of providing non-audit services (NAS) on auditor inde-pendence is an excerpt of an interview with Rodger Hughes, former partner in charge of Pricewater-houseCoopers UK Assurance and Business Advisory Services (Nixon 2004, p. 34).

To this day, no one has produced any evidence, and indeed academic studies have actually provedotherwise, to demonstrate that providing non-audit services creates any problem in terms of auditquality. And there are very good arguments that providing some non-audit services improves theaudit quality.This idea that its somehow wrong to provide other services to audit clients is complete and utternonsense, and anyone who really understands what we do wouldnt be fooled by that. Theres nodoubt that there are certain services that make absolute sense for your auditors to do and couldntin any way be regarded as compromising auditor independence.

By referring to supporting academic studies, this statement seeks to convince the public thataccounting rms do not impair audit quality when they offer NAS. In the larger context, the interviewis part of large rm attempts to inuence public policy on auditor independence that began in 2000,when the SEC proposed new independence rules. The Big Five accounting rms rst intensied theirlobbying efforts by approaching members of Congress, increasing correspondence to the SEC, andsharply increasing campaign contributions (Boyd, 2004; Turner, 2006). Since the Enron andWorldComscandals and passage of the SarbanesOxley Act (SOX) in 2002 that limited the types of NAS that auditrms could perform for their audit clients, lobbying has continued and is being extended to the issueof legal liability, where the Big Four rms have pursued caps (Directorship, 2007). The rms have eco-nomic incentives to advocate their positions on these issues: Big Four rms fastest growing segmentin 2007 was advisory services, at rates of 1525% (Deloitte, 2007; Ernst and Young, 2007; KPMG, 2007;PricewaterhouseCoopers, 2007). Because much of that growth occurred in such international marketsas China, large CPA rms may wish to discourage the spread of SOX-style regulation to such markets.Even within the US, large rms continue to advocate relaxing current independence rules that can in-hibit competition among accounting rms, according to William Parrett, Global CEO of Deloitte Tou-che Tohmatsu (Deloitte, 2006). Large rms may be concerned about state boards of accountancy thatcontemplate adopting certain SOX provisions for governmental, regulatory and other audits, i.e., acascade effect of SOX (Brau and Fawcett, 2006). They will likely continue lobbying against such leg-islative interventions, nationally and internationally (Labaton and Glater 2003; Morris, 2003). Suchlobbying may become even more prevalent as debate over the costs and benets of SOX intensies(Hemphill, 2005) and Congressional and Mayoral leaders (Schumer and Bloomberg, 2006) call fornew legislation.

The quote is signicant because, in summarizing the results of academic studies, Mr. Hughes acts asa high-prole intermediary between the accounting academy and stakeholders in capital markets investors, regulators, and other accounting practitioners not conversant with academic research.How intermediaries like Mr. Hughes view research could affect public policy more than the original

354 P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373endence than would small-rm practitioners.

The second seminal paper is Goldman and Barlevs (1974) analysis of power relationships betweenauditors and their clients, where the state of professional ethics helps auditors minimize client pres-

P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373 355sure. We hypothesize that auditors, who experience rst-hand the effects of independence and inter-nal independence safeguards (Kinney, 1999), are less likely than non-auditors to report beliefs thatproviding NAS could impair independence, regardless of their rms sizes.2 We also predict thatlarge-rm auditors will be less likely than any other practitioners (non-auditors in large rms and allsmall-rm practitioners) to report beliefs that NAS could compromise auditor independence.

A second set of hypotheses addresses changes in self-reported beliefs after practitioners read sum-maries of credible research on the effect of provision of NAS on auditor independence. These hypoth-eses are founded on the concept of belief perseverance, the tendency to maintain prior beliefs even inthe face of contradictory information (Anderson et al., 1980; Anderson and Lindsay, 1998; Anderson,2007; Slusher and Anderson, 1996). While expecting (based on belief perseverance) that researchsummaries will not greatly inuence practitioners beliefs in general, we nevertheless predict differ-ences in belief revision related to occupational group. We argue that avowal processes that largeaccounting rms management control systems support (Covaleski et al., 1998) motivate large-rmpractitioners to engage in belief perseverance more than do small-rm practitioners. Similarly, profes-sional ethics role in maintaining auditors power relationships with their clients (Goldman and Barlev,1974) motivates them to persevere in their beliefs more than non-auditors. Practitioners with thestrongest motivation to persevere are auditors in large rms, where avowal and power dynamics re-lated to ethics are combined.

Two papers with similar methods but contrary results provide the research needed to test thehypotheses. Frankel et al. (2002) found in part that non-audit fees associate positively with the mag-nitude of their clients discretionary accruals, providing evidence consistent with the view that suchservices compromise auditor independence. Ashbaugh et al. (2003) performed tests similar to Frankelet al. but after controlling for rm performance found no systematic evidence supporting their claimthat auditors violate their independence as a result of clients purchasing relatively more non-auditservices (p. 611). These papers, appearing in the same journal within 1 year and using the same re-search methods, present contradictory results about the independence issue. We summarized the pa-pers as part of a questionnaire for distribution to four groups of practitioners: large-rm auditors,large-rm non-auditors, small-rm auditors, and small-rm non-auditors. Practitioners randomly re-ceived a summary of Frankel et al., Ashbaugh et al., or both. This research design differs from otherresearch on practitioners beliefs about independence in that other studies manipulated informationfound in hypothetical audit cases e.g., Imhoff, 1978; Lowe et al., 1999; Wright and Booker, 2005).

We asked two nominal multiple-choice questions: one on agreement that auditing rms impairtheir independence when accepting non-audit fees from audit clients, and the other for a range ofnon-audit fees that would likely compromise independence. The rst time these questions appeared(before the summary) all of the hypotheses were supported. Large-rm practitioners were less likelythan small-rm practitioners to indicate that auditing rms impair their independence when perform-ing NAS for their audit clients. Auditors answered positively less often than non-auditors and a smallerpercentage of large-rm auditors compared to all other practitioners reported beliefs that indepen-dence could be impaired. Large-rm practitioners, auditors, and large-rm auditors also respondeddifferently to the question on non-audit fees than their comparison groups (small-rm practitioners,non-auditors, and all other practitioners respectively), groups that more likely answered that rela-tively small ratios of non-audit fees to total fees could impair auditor independence.

After respondents read the summary, we asked both questions a second time. Regarding impair-ment of independence, when rms accept non-audit fees from audit clients, 9% of large-rm practitio-ners, 8% of auditors, and only 5% of large-rm auditors changed their answers. About 20% of theircomparison groups (small-rm practitioners, non-auditors, and all other practitioners) changed an-swers, signicantly greater fractions and consistent with the differential belief persistence hypotheses.Results regarding changes in answers to the non-audit fees question were in the predicted direction

2 Non-auditing practitioners may specialize in any area other than auditing. We dene auditors as practitioners who describe

themselves as such in our instrument.

higher insider holdings). Reynolds et al. (2004) replicated the Frankel et al. result, but after controlling

for high-growth clients found that the Frankel et al. result for the fee ratio disappeared. Mitra andHossain (2007) found that blockholders of common stock vary negatively with the non-audit servicefee ratio, suggesting that they play a monitoring role and affect managements decision to purchaseNAS.

In summary, research since Frankel et al. (2002) has qualied their result to specic sample char-acteristics and has reduced concern over the relationship between auditor independence and NAS. Anexception to this generalization is Srinidhi and Gul (2007), who concluded that non-audit fees areassociated with a loss of audit quality, while audit fees result in higher quality. Nevertheless, togetherbut not as strong. Large-rm practitioners reported signicantly fewer changes in their beliefs lessthan small-rm practitioners (11% versus 20%); no signicant differences arose regarding auditorsversus non-auditors or large-rm auditors compared to all other practitioners.

The following section reviews the literature on the effect of providing NAS on auditor indepen-dence, management control in large rms, the role of ethics in conict of interest, and belief persis-tence. Six hypotheses, three each on practitioners initial and revised beliefs, are then presented.The remaining sections present the method, results, and conclusions.

2. Literature review and hypothesis development

2.1. Auditor independence and non-audit services

The Second General Auditing Standard and Audit (AU) Section 220 requires CPAs to maintain inde-pendent mental attitudes in all audits and attest engagements. This framework consistently viewsauditor independence as a trait correlated with the relatively unobservable traits of integrity andobjectivity (Kinney 1999, p. 70). AICPA Professional Standards [Code of Professional Conduct] (ET)Section 101.01 (Independence) requires all CPAs providing attest and non-attest professional engage-ments to maintain their independence (e.g., independence in mind and in appearance). However,empirical research usually avoids dening auditor independence strictly in terms of unobservablemental states that are virtually impossible to prove (Schneider et al., 2006). The domain of empiricalresearch contains such observable correlates of independence as providing NAS and ownership stakesin client rms.

SEC Final Rule S7-13-00 (20003a), Revision of the Commissions Auditor Independence Requirements,classies an unobservable independent mental attitude as independence in fact, but also imposesproxy statement disclosures of non-audit fees to help ascertain an auditors capability to make impar-tial judgments. The disclosure requirements address independence in appearance. Rule S7-13-00deems an auditor not independent of a client in appearance if a reasonable investor, with knowledgeof all relevant facts and circumstances, would conclude that the auditor is not capable of exercisingobjective and impartial judgment (SEC, 2000, Section I, quoted in Frankel et al., 2002, p. 73). As statedin the preceding paragraph, empirical research focuses on observable correlates of independence suchas non-audit fee disclosures, and thus is consistent with the Rules orientation towards independencein appearance. We also focus on independence in appearance in this paper.

Frankel et al.s (2002) nding that non-audit fees are positively associated with the magnitude ofclients discretionary accruals stimulated interest in the association between these variables and itsimplications regarding auditor independence. Ashbaugh et al. (2003) countered their result by per-forming similar tests with additional controls for rm performance and found no such consistent rela-tionship between non-audit fees and discretionary accruals. Chung and Kallapur (2003) also replicatedFrankel et al. controlling for industry effects and were unable to nd a relationship. Geiger and Rama(2003) did not nd a signicant effect of non-audit fees on audit opinions in a sample of distressedrms. Kinney et al. (2004) had mixed results regarding the association between NAS and restatements,but reported a general lack of adverse economic impacts. Larcker and Richardson (2004) found a po-sitive association between the ratio of non-audit fees to total fees and unexpected accruals, but onlyfor 8.5% of their sample, consisting of smaller rms with distinctive corporate governance (including

356 P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373Frankel et al. and Ashbaugh et al. (2003) have formed the foundation for most archival research on the

relationship between NAS and auditor independence in this decade, thus helping to motivate thisstudy of belief perseverance among accounting and auditing practitioners.

2.2. Practitioners stated beliefs about auditor independence and non-audit services [NAS]

The accounting profession has historically opposed restrictions on the scope of services auditorscan provide to their audit clients, e.g., AICPA CEO Melancons (2000a, p. 26) response to the SECs(2000) proposal to proscribe 10 non-audit services that auditors could provide to their audit clients.He said that no study of the perceptions of users of audited nancial information supports the mas-

requiring at least a 1-year cooling off period for [high-level] auditors moving to client rms exacerbates this problem. Facing suchnarrow career paths, potential recruits may shun public accounting for private industry or government. Jean Wyer of

P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373 357PriceWaterhouseCoopers commented on the impairment of recruiting effects of the 1-year cooling-off period at a 2005 AmericanAccounting Association Auditing Midyear Meeting plenary session.

6 We assume that these lobbying activities supply a frame of reference to individual large-rm practitioners regarding thesive shift in public policy that the proposed rule would enforce. Whether Melancon accurately as-sessed public support for proposed rule changes, his blanket statement raises the question, Will allpractitioners state that there is a relationship between auditor independence and provision of NASand will they disregard evidence to the contrary? We answer this question by dividing practitionersinto subsamples based on two criteria: size of the accounting rm and area of specialization (auditversus non-audit).

We assert that the divergent interests of large and small accounting rms cause varying beliefsabout independence in appearance.3 The former groups self-interest would favor regulators allowingtheir rms to offer NAS; competing with other professional service consulting rms requires CPA rmsto market and cross-sell the largest possible array of services (Wyatt, 2004).4 Before passage of the SOXand Section 404 increased the demand for compliance services, auditing was deemed a mature industryin contrast to the growth area of NAS, with the long-term success of accounting rms then linked to mar-keting such services. For example, former Touche Ross managing partner Russell Palmer (1989) stressesthat this maturation process had changed the professions very identity due to the increasing importanceof consulting to a profession once dened by its auditing function; the expanding product base for auditscan no longer satisfy larger rms need for growth. However, before passage of the SOX, SEC Chair Levitt(2000) noted that consulting services represented an ever-increasing proportion of larger CPA rms totalrevenues, a trend that could impair their independence.5

Large accounting rms lobbying efforts regarding independence rules reect their economic inter-ests. In the 1990s, the large rms and the AICPA resisted SEC attempts to restrict consulting servicesthat they could offer to audit clients (Wyatt, 2004). Gerde and White (2003) note that in 2000 the BigFive rms argued that the SECs proposed segregation of work requirements restrained trade, por-trayed as a conict largely between large accounting rms and the SEC. In 20022003, the Big Fouraccounting rms lobbied the SEC to classify due diligence work on mergers as audit-related fees,rather than audit fees (Weil and Rapoport, 2003), hoping that this classication would attract lessattention regarding independence. In January 2003, after large rm lobbying, the SEC decided notto restrict tax work performed for audit clients (Parker, 2003).6 However, SEC Release No. 34-53677(June 2, 2006) reversed this conclusion in light of the Public Company Accounting Oversight Boards(PCAOB) rulings prohibiting auditors from performing certain tax services.

Thus far we argue that large accounting rms self-interests regarding NAS can be inferred fromtheir lobbying positions; a literature on socialization in the profession and practitioners identicationwith their rms (e.g., Fogarty and Dirsmith, 2001; Empson, 2004; Almer et al., 2005) provides a basisfor extending rm-level positions to the reported beliefs of individuals. Covaleski et al.s (1998) eth-

3 In the rest of the paper, we call independence in appearance independence unless otherwise specied.4 Large rms have divested themselves of consulting services, but Wyatt (2004) claims they did so under duress rather than

under the belief that they acted in the rms best interests.5 Nonetheless, AICPA President Melancon (2000b) stated that despite such possible threats to independence, competition to

recruit accounting graduates helps justify large rms performing such services. Limiting the array of NAS could hinder such rmsfrom recruiting highly qualied graduates who may wish to perform both consulting work and audit services. SOX Section 208sindependence issue, and that they tend to adjust their beliefs accordingly.

nographic eld study of management control in Big Six rms suggests that individual practitionerswill report beliefs that are consistent with their rms positions. Covaleski et al. (1998, p. 300) relyon the process of avowal as Foucault (1988) described to characterize control in Big Six rms as fol-lows (emphasis added):

358 P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373In the following sections, our purpose is to demonstrate howManagement by Objective (MBO) andmentoring can be understood as managerial programs directed at transforming the subjectivity ofprofessionals into entrepreneurs or corporate clones. In particular, whereas MBO as a disciplinarytechnique seeks to forge corporate clones by integrating individual goals within rm goals, men-toring, as a technique of the self, is complicit in realizing corporate clones when people avow orga-nizational imperatives as their own.

The organizational imperative at issue here is large accounting rms ability to offer NAS to theiraudit clients; Covaleski et al. (1998) establish that control systems are in place to encourage large-rmpractitioners to avow positions supporting provision of NAS, particularly that auditor independence isnot compromised. Such ethnographic studies have not been conducted in smaller accounting rms,and we make no assertions as to whether they generally rely on avowal as a control process. However,smaller rms have not lobbied as large rms have, participate less in the audit market, and do notshare the same economic interests, so less reason arises to expect them to use avowal processes spe-cically to encourage practitioners to express the opinion that provision of NAS does not compromiseauditor independence.

The depth of personal conviction of practitioners avowed positions consistent with rms imper-atives faces much interpretation and debate. We asked them direct questions about independence,recognizing that two dimensions exist in these self-reports: practitioners (1) true beliefs, whichmay be subconscious and consequently difcult to report (Moore et al., 2006) and (2) actual reportsto others (e.g., to researchers). The latter dimension entails an awareness of reporting a position, albeitanonymously, to all readers of the survey results. We do not pretend to capture private beliefs andchanges therein that may be inaccessible to practitioners, even if they wanted to report them. We takethese self-reports at face value; they are the beliefs that practitioners want represented, through us, tothe public.7 We predict that self-reports of beliefs will suggest more concern about effects of NAS onindependence among small-rm than large-rm practitioners, who may be encouraged to avow thatindependence can be maintained.

H1. Small accounting rm (auditors and non-auditors combined) practitioners will be more likelythan large rm (auditors and non-auditors combined) practitioners to report beliefs that providingnon-audit services to audit clients will reduce auditor independence.

Besides effects of economic interests on practitioners beliefs, we posit a specialization effect suchthat auditors should usually view providing NAS as a smaller threat to independence than would non-auditors. We posit two sources of auditors beliefs on this topic: procedural and ethical. First, auditorsexperience restrictive independence guidelines within their rms which, combined with compensa-tion plans that protect auditors economic interests, encourage objectivity and integrity of the audi-tor (Kinney, 1999, p. 73). These safeguards exist regardless of the state of external regulation andsanction (Kinney, 1999), although external principles, rules and threats likely strengthen the percep-tion among auditors that safeguards are effective.

Second, we apply Goldman and Barlevs (1974) theory of conict of interests and power relation-ships, cited in papers such as Nichols and Price (1976), Shockley (1981), Knapp (1985), and Green(2005). In this theory, a key source of power for accounting rms seeking to resist audit client pressureis the state of professional ethics, especially if they are elaborate and vigorously and visibly enforced

7 An alternative explanation of our approach to reported beliefs is that we have incorporated demand effects into the researchdesign (explained more fully in the methods section). Participants are fully aware that the research question concerns therelationship between providing NAS and auditor independence, and how the research summary is related to this issue. We rely ontheir awareness to predict differences in what could be considered the personal lobbying positions of various groups ofpractitioners. We generalize to what practitioners will report to the public about this issue and the effect of research on their

beliefs, not to how they would interact with actual audit clients.

(Goldman and Barlev, 1974, p. 712).8 We extend this line of reasoning from a supposedly objectivestate of ethics to practitioners perceptions of their efcacy. Auditors likely will view professional eth-ics as more powerful allies than non-auditors because they are more familiar with them and may have

P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373 359H2. Non-auditors (in both small and large rms) will be more likely than auditors (in both small andlarge rms) to report beliefs that providing non-audit services to audit clients will reduce auditorindependence.

We expect the rm-size effect based on economic interests and the audit specialization effect pre-dicted in H1 and H2 to be most pronounced among large-rm auditors. Avowal control processes inlarge accounting rms as described by Covaleski et al. (1998) reinforce auditors experience of bothindependence-promoting procedures and the power-enhancing effect of professional ethics (Goldmanand Barlev, 1974). A practical factor contributing to this effect is that larger rms can segregate betteraudit and non-audit teams, facilitating adherence to ethical standards on the audit side when provid-ing NAS. We do not assert that procedures and professional ethics are or are not actually effective inmaintaining independence in large rms, but suggest that large-rm auditors experience them moredirectly than other practitioners, resulting in stronger belief in their efcacy.

H3. Auditors in large rms will be less likely than all other practitioners (including non-auditors insmall and large rms and auditors in small rms) to report that providing non-audit services to auditclients will reduce auditor independence.

2.3. Differential belief perseverance

The rst three hypotheses examine accounting professionals reported beliefs before seeing newevidence of auditor independence. Based on the belief perseverance concept, the tendency to clingto ones initial belief even after receiving new information that contradicts or disconrms the basisof that belief, (Anderson, 2007, p .109) we expect that practitioners will tend to maintain their beliefsafter reading summaries of new evidence. Three psychological processes may contribute to belief per-severance (Anderson, 2007), which relates closely to primacy effects (Nickerson, 1998). First, peopleusing the availability heuristic rely upon a memorable argument, and in our study this would super-sede the content of a summary. Availability is strongest when a theory supports memorable argu-ments (Anderson et al., 1980; Anderson and Lindsay, 1998), or more explanations exist to support aprior belief than an alternative one (Slusher and Anderson, 1996), and most accounting professionalshave likely discussed theories about auditor independence in their education and careers. Second, un-der the illusory correlation process, people remember more conrming than disconrming cases, which

8 Goldman and Barlev (1974)also discuss three other sources of auditors power: law, the nature of the problem solved (routineor non-routine), and beneciaries from services. We deem these sources less relevant to auditors beliefs and therefore limit ourdiscussion to the state of professional ethics. In addition, we do not argue that auditors are aware of Goldman and Barlev (1974),personally relied on them in negotiations with clients. While opinions vary as to the current state ofprofessional ethics in auditing, we assume that auditors perceive them differently than do non-audi-tors, and that thus a stronger belief than non-auditors that independence can be maintained whenproviding NAS. David et al.s (1994) survey of 161 practitioners from a large CPA rm supports thisposition; auditors attributed signicantly more importance than non-auditors to the AICPA Code ofProfessional Conduct statement regarding maintaining independence when providing auditing andother attestation services.

Additionally, Gendron and Suddaby (2004) interviewed a small sample of Big Five audit partners;four of ve did not believe that non-audit fees threaten auditor independence, consistent with ourexpectations based on procedural safeguards and Goldman and Barlevs (1974) posited power rela-tionships. Auditors may be more knowledgeable about ethics and safeguards than non-auditors; forexample they may be more aware that consultants on tax or information systems are not the samepeople who audit. Due to differing perceptions of the efcacy of ethics and knowledge of how safe-guards operate, we predict that the prior beliefs of auditors and non-auditors will differ.only that their beliefs about the role of ethics may be consistent with Goldman and Barlevs theory.

Based on belief perseverance, we expect research summaries not to inuence greatly practitionersgeneral beliefs, but we still predict differences in belief revision related to occupational group. Largerms have economicmotives to provide a full range of NAS to audit clients, and if practitioners in thoserms choose to report beliefs consistent with lobbying positions (H1), then they should be less likely toreport changes in their beliefs than small-rm practitioners. The basis of H1 was the avowal controlprocesses large accounting rms employed (Covaleski et al., 1998); H4 explores the strength of avowalwhen large-rm practitioners are exposed to evidence on the independence issue. To the extent thatthey were transformed into self-managing subjects in their discourse (Covaleski et al., 1998, p.322), large-rm practitioners will refrain from changing their reported beliefs regardless of evidenceprovided. Small-rm practitioners, whose rms have less reason to invoke avowal control processeswith regard to providing NAS to audit clients, may be less motivated to report unchanged positions.

H4. After reading evidence regarding the effect upon auditor independence of providing non-auditservices to audit clients, practitioners in small accounting rms (auditors and non-auditors combined)will be more likely to report changes in their beliefs than practitioners in large rms (auditors andnon-auditors combined).

The argument regarding audit specialization (H5), following H2 on auditors initial beliefs auditors,relies also on Goldman and Barlev (1974). Auditors beliefs about power relationships with audit cli-ents and the state of professional ethics are likely stable, being the product of personal experience andcareer interests. Auditors would face some difculty in reporting changes in their beliefs about effectsof NAS on the basis of one piece of evidence. Non-auditors have less at stake in the balance of powerwith audit clients, both psychologically and professionally, and may be less reluctant to reportchanges in their beliefs. As is the case with H4, we do not claim that non-auditors will change answersoften on the basis of a short summary, only that they are less motivated to report consistent beliefsthan auditors.

H5. After reading evidence regarding the effect upon auditor independence of providing non-auditservices to audit clients, non-auditors (in small and large rms) will be more likely to report changesin their beliefs than auditors (in small and large rms).

We posit that belief revision will be least among large-rm auditors. If avowal control processes(Covaleski et al., 1998) and their opinions about the effectiveness of professional ethics in counteringthe power of audit clients (Goldman and Barlev, 1974) affect their initial reports, large-rm auditorswould be motivated to report consistent reasoning after evidence is presented. Other practitionergroups lack this combination of management control and personal interest in the buffering effect ofprofessional ethics.

H6. After reading evidence regarding the effect upon auditor independence of providing non-auditservices to audit clients, auditors in large rms will report changes in their beliefs less often than allother practitioners (including non-auditors in small and large rms and auditors in small rms).

3. Method

3.1. Questionnaire development

To collect relevant data, we developed and administered a survey instrument containing two ques-dence regarding the effect of NAS on auditor independence. Involving heuristics in belief perseveranceprocesses is not necessarily dysfunctional in auditing; conservatism, for instance, may be viewed as afunctional heuristic that serves to minimize economic losses (Smith and Kida, 1991).may strengthen practitioners beliefs in the face of new summarized evidence. Finally, data distortioninvolves inventing conrming evidence and ignoring disconrming evidence; the latter disconrmingprocess would be relevant to this study. The study is not designed to determine which of these threeprocesses dominates practitioners belief perseverance. Rather, we nd in this literature a strong basisfor expecting that their beliefs will not be easily changed by a summary of large-sample research evi-

360 P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373tions about the effect of provision of NAS on auditor independence along with manipulated summa-

ant fac stance ed impa nt, then gestions t indep

The two sab t the st ebased on rm-level non-audit fees, which may appear to compromise independence. The rst ques-

ex ple, tho st willin dicate t indepen tth rst quaclients.a. Yes b. No c. Depends upon circumstances d. Do not know

2. Non-audit fees representing what percentage of total audit rm fees will likelycompromise the auditors independence?a. 125% d. 76100%b. 2650% e. Do not knowc. 5175%

Per H1H3, small-rm practitioners, non-auditors, and all except large-rm auditors would morelikely answer yes to the rst question than large-rm practitioners, auditors, and large-rm auditors.The former groups would tend to select lower ranges of percentages in response to the second ques-tion. H4H6 predict that the former groups would be more likely to select different responses to thesequestions when asked a second time in Part C.

In Part C we developed three versions of a one-paragraph summary: (1) Frankel et al. (2002) sug-gesting that such NAS impair auditor independence; (2) Ashbaugh et al. (2003) suggesting that inde-pendence is not impaired; and (3) a summary of both (see Appendix A). The third version, slightlylonger than the other two, states that the two studies support different conclusions due to Ashbaughet al.s controlling for rm performance. There are three reasons for this balanced design. First, wedid not assume that all respondents in any group (small rm, large rm, etc.) had the same priorbeliefs about the effects of NAS on independence, and therefore we could not target summariesto individual respondents. Second, with respect to the second question about the ratio of non-auditfees to total audit rm fees that would likely compromise auditors independence, a summary could

be1consistenrtile (a) rather than the second (b).

Auditing rms impair their independence when they accept non-audit fees from auditame se mot with respondg to inents prior belihat non-audit fees compromiseefs and they could select a stronger consdence may selec

tion is categorical while the second allows respondents to report the strength of their positions. Forou

multiple-choice questions that appeared in Parts B and C follow. Neither question askate of mind of individual auditors independence in fact; they ask about independencqu , assume tha endence refers to independence in appearance

an rtial judgme an auditor is not considered independent of a client. In all of the followin

ev ts and circum s, would conclude that the auditor is not capable of exercising objectivries of the Frankel et al. (2002), Ashbaugh et al. (2003), or both papers. Surveys are appropriate for col-lecting data to help understand or predict human behavior (Alreck and Settle, 1985) and to obtainrespondents preferential characteristics (Rea and Parker, 1997).

The questionnaire contains four parts: Part A, demographic questions; Part B, questions concerningtheir beliefs about auditor independence; Part C, the article summary followed by the same questionsabout auditor independence that appeared in Part B; and Part D, an open-ended question asking whythe summary paragraph did or did not affect respondents opinions on the topic. Respondents wereasked in Part C to give the same answers as in Part B if their opinions did not change or to selectan alternative if they revised their opinions. They were told that they could refer back to Part B if theywanted to check their prior answers.

At the beginning of Part B, the following paragraph dened independence in appearance and direc-ted respondents to answer questions with respect to this concept.

Part B contains questions about auditor independence, which SEC Final Rule S7-13-00 denes as a men-tal state of objectivity and lack of bias. Since mental states are difcult to observe, the SEC set out anindependence in appearance criterion, such that if a reasonable investor, with knowledge of all rel-

P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373 361istent answer (an

even lower or higher range consistent with priors). Therefore, summaries both inconsistent and con-sistent with prior beliefs were of interest. Third, a version of the summary covering both papers wasincluded to give some indication as to which paper may have been more persuasive in a directcomparison.

All summaries were written in a neutral language, were quite similar, and delivered a simplemessage about the effect of NAS on auditors independence. They described the two experimentalvariables as discretionary income-increasing accruals, which is a measure of earnings management,and the ratio of non-audit fees to total fees. A positive association between these variables, foundin Frankel et al. (2002) but not in Ashbaugh et al. (2003), suggests that providing NAS reduces inde-pendence. Identifying the source journal as The Accounting Review, we noted in the summaries thatndings in each paper were based on large samples of about 3000 observations.9 Pre-testing the survey

designs, questions about external validity remain. Frankel et al. (2002) and Ashbaugh et al. (2003) in-

(who would return them to us in sealed envelopes) or send them to us directly. One author also

362 P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373administered the surveys to targeted users and preparers attending professional meetings in a largeMidwest metropolitan area prior to his meeting presentations and to two large accounting rmsgroups of public auditors. Response rates were indeterminable for either technique because we donot know the number of questionnaire recipients.

4. Results

Of 349 received responses, 24 (7%) who reported having read TAR after 2001 were deleted from thesample to ensure that Frankel et al., (2002) or Ashbaugh et al. (2003) did not affect reported initialbeliefs.11 Table 1, Panel A shows the distribution of the remaining responses by subgroup, deningsmall rms as having up to 500 professional employees and large rms over 500.12 Practitionerswho indicated that their professional work involves (does not involve) auditing work were classied

9 While Frankel et al. (2002) and Ashbaugh et al. (2003) used the ratio of non-audit fees to total fees, we instead used the ratio ofnon-audit fees to audit feesbelieving that this ratio is a bit clearer to our respondents. In any event, both sets of ratios shouldprovide fairly equivalent results. We note, however, that Ashbaugh et al. [p. 612] preferred using the sum of audit and non-auditfees, rather than the fee ratio to help measure economic dependence, but we wanted to use comparable variables for oursummaries.10 The summary of both Frankel et al. (2002) and Ashbaugh et al. (2003) also included an explanation for the difference in thepapers results.11 We also ran statistical tests including the 24 TAR readers, and the results were unaffected. Sixteen other responses werereceived from practitioners who did not work for public accounting rms; we deleted these responses.12 The question regarding rm size gave the following ranges of professionals employed in the respondents rm as responses(number of responses in parentheses): 1 (31), 25 (49), 610 (23), 1120 (22), 2150 (43), 51100 (10), 100200 (8), 201500 (14),and over 500 (125). The nal category sought to capture large-rm effects; however, all tests were run with large rms dened asclude many other tests and interpretations; our design could not present the full articles to respondents,ask them to read and understand them, and then infer that changes in their answers were reactions tospecic ndings. We do not attempt to draw conclusions regarding these or other accounting and audit-ing research papers as complete documents.

3.2. Survey method

We asked senior contact persons to distribute versions of our questionnaire to many of their rmsstaff professionals. Respondents could either return the anonymous responses to the contact personsinstrument on 10 local CPA practitioners, four national CPA practitioners, ve accounting and businessprofessors, and four local Financial Executives Institute [FEI] chapter members revealed no comprehen-sion difculties.

The concise summaries describe only the two variables of interest, a denition of earnings manage-ment, the sample size, the result, and a conclusion regarding the effect of provision of NAS on auditorindependence.10 This presentation allows us to conclude that changes in answers represent reactions toa specic test, i.e., an attempt to maintain internal validity. But, as is common in experimental researchgreater than 200 professionals, and signicance levels were not affected.

Table 1Sample distribution.

Panel A: Responses by subgroupSmall-rm non-auditorsa 172Small-rm auditors 28Large-rm non-auditors 52

P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373 363as auditor (non-auditors). Non-auditors all had work experience in accounting and/or had accountingdesignations (e.g., CPA). Sample sizes range from 28 small-rm auditors to 172 small-rm non-auditors,but as shown in Table 1, Panel B, within each group the three versions of the summary paragraph weredistributed equally (in thirds). A chi-square test indicates no signicant differences in distributions ofparagraph versions.

The rst multiple-choice question asked whether auditing rms impair their independence whenthey accept non-audit fees from audit clients, responding yes, no, depends upon circumstances, and donot know. Frequencies of responses appear in Table 2. Majorities ranging from 56% to 78% of all groupsin Panels AC selected the depends on circumstances responses, which could be expected given thecomplexity of auditor independence. A categorical yes or no answer indicates a strong desire to report

Large-rm auditors 73Total responsesb 325

Version ofparagraphconclusion

Small-rmnon-auditors

Small-rmauditors

Large-rmnon-auditors

Large-rmauditors

Panel B: Sample frequencies of paragraph summariesAuditors are less

independent55 (32%) 10 (36%) 18 (35%) 26 (36%)

Independence is notaffected

60 (35%) 9 (32%) 16 (31%) 23 (32%)

Both articles aresummarized

57 (33%) 9 (32%) 18 (35%) 24 (33%)

Total 172 (100%) 28 (100%) 52 (100%) 73 (100%)

a Respondents in small rms reported up to 500 professional employees in their rms.Those in large rms indicated over 500 professionals.

b Sample sizes are reduced slightly in subsequent tables due to unanswered questions.unconditional belief that accepting non-audit fees does or does not affect independence. In Panel A,consistent with H1, practitioners in small rms were much more likely to answer yes than those inlarge rms (26% versus 5%). The former group also indicated less often that impairment depends uponcircumstances (58% versus 70%). The chi-square p value for Panel A is .000.13

As reported in Table 2, Panels B and C, the frequency results regarding the effect of audit special-ization (H2) and large-rm auditors compared to all other practitioners (H3) are similar to Panel A.Large-rm auditors answered yes to the impairment question least often (3%, Panel C). The chi-squarep value is .000 for Panels B and C.

H4H6 focus on changes in beliefs following reading the article summary. Regarding the rst mul-tiple-choice question on impairing independence, we combined the depends and the do not knowanswers because they are both uncommitted responses. Thus, we classied Table 3 subjects as chang-ing their answers if there was any change between yes, no, and depends/do not know, and as notchanging their answers if no changes arose between these three categories.

Sixteen percent of the total sample changed their answers to the independence impairment ques-tion the second time it was asked, after respondents read the summary paragraph. The effect of rm

13 All tests in this and remaining tables are chi-square due to the nominal level of data, specically these responses: yes, no,depends on circumstances, do not know, did not change answer, and changed answer. ANOVA or regression cannot be used; valuesof 1, 2, etc. cannot be assigned to these responses because there is no ordinal, let alone interval or ratio, relationship among thevalues. As a result we were unable to control for demographic variables such as years of experience in the tests; setting criteria fordemographic groups (e.g., less or greater than 10 years of experience) would be arbitrary and results in insufcient samples sizesfor chi-square tests. We recognize this as a limitation of the study.

Table 2Responses to rst impairment question.

Panel A: Effect of rm size (chi-square p value = .000a)

364 P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373Is independenceimpaired?

Small-rm auditors and non-auditors (n = 198) (%) Large-rm auditors and non-auditors(n = 125) (%)

Yes 26 5No 15 23Depends on

circumstances58 70

Do not know 1 2Total 100 100

Panel B: Effect of audit specialization (chi-square p value = .000)Is independence

impaired?Non-auditors in small and large rms (n = 222) (%) Auditors in small and large rms

(n = 101) (%)Yes 23 6No 19 16Depends on

circumstances56 78

Do not know 2 1Total 100 100

Panel C: Large-rm auditors versus all other practitioners (chi-square p value = .000)Is independence

impaired?Non-auditors in all rms and auditors in small rms(n = 250) (%)

Auditors in large rms (n = 73) (%)

Yes 22 3No 18 18Depends on 58 78size is reported in Table 3, Panel A; 20% of small-rm practitioners and 9% of large-rm practitionerschanged their answers. The chi-square test yields a p value of .007, supporting H4. Again the resultsare similar regarding audit specialization (H5, Panel B) and large-rm auditors compared to otherpractitioners (H6, Panel C), with the lowest frequency of changed answers reported for large-rmauditors (5%, Panel C). The chi-square p values for Panels B and C are both less than .05.

Table 4 breaks down changed opinions by version of the summary. A consistent change occurswhen an uncommitted answer, or an answer contrary to the studys conclusion, changes to an answerconsistent with the conclusion. About half of changed opinions among small-rm non-auditors (15)were consistent with the summary concluding that providing NAS impairs auditor independence; atotal of six other practitioners changed this way, including only one large-rm auditor. These resultsappear to drive the differences shown in Table 3. This pattern is repeated for the summary nding thatindependence is not impaired in that more (seven) small-rm non-auditors made consistent changesthan other (three) practitioners. Regarding the balanced summary of both articles, few changed an-swers appeared (one or two each) for all groups except for small-rm non-auditors, who recordedeight changed answers. Table 4 also indicates that four small-rm non-auditors, one large-rmnon-auditor, and one large-rm auditor changed answers in a fashion inconsistent with the summarythey read; uncommitted answers were changed to inconsistent answers, or answers consistent withthe studys conclusion were changed to uncommitted or inconsistent answers. The chi-square testsreported in Table 3 are not affected when deleting these inconsistent changes from the sample.14

circumstancesDo not know 2 1Total 100 100

a For chi-square tests, both of the do not know cells have expected counts less than ve. The p values are the same with thedo not know row included or excluded from the tests.

14 Forty respondents answered either yes or no to the rst question about impairing independence and received a summarycontrary to that opinion (of either Frankel et al. (2002) or Ashbaugh et al. (2003)), but these numbers are too small to conducthypothesis tests on this subsample.

Table 3Changes in answer to impairment question after reading summary paragraph percentages.

Panel A: Effect of rm size (chi-square pvalue = .007)

Is independence + impaired? Small-rm auditors and non-auditors Large-rm auditors and non-

P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373 365The second multiple-choice question asked what ratio of non-audit to total audit rm fees wouldlikely compromise an auditors independence; lower percentages indicate that NAS will likely impairindependence. Responses to the rst time this question was asked appear in Table 5. The effect of rmsize is shown in Panel A; a higher percentage of small-rm practitioners (24%) selected the minimum125% category, reporting strong beliefs that non-audit fees compromise independence, than the per-centage of large-rm practitioners who did so (9%). The former group also indicated do not knowless often than the latter (33% versus 48%). The chi-square test of Panel A has a p value less than.001, supporting H1.

(n = 192) (%) auditors (n = 124) (%)Did not change answera 80 91Changed answer 20 9Total 100 100

Panel B: Effect of audit specialization (chi-squarep value = .021)

Is independence impaired? Non-auditors in large and small rms(n = 215) (%)

Auditors in large and smallrms (n = 101) (%)

Did not change answer 81 92Changed answer 19 8Total 100 100

Panel C: Large-rm auditors versus all otherpractitioners (chi-square p value = .006)

Is independence impaired? Non-auditors in all rms and auditorsin small rms (n = 243) (%)

Auditors in large rms(n = 73) (%)

Did not change answer 81 95Changed answer 19 5Total 100 100

a Changed answers are dened as any change between yes, no, and uncommitted answers (depends or do not know).Table 5, Panel B reports the effects of audit specialization on responses to the fees question. Re-sponses of auditors again reect less concern that provision of NAS compromise independence; forexample, 21% of non-auditors selected the 125% category, compared to 11% of auditors who choseit. The chi-square p value for Panel B is .055, indicating marginal support for H2. Table 5, Panel C isconsistent with Panels A and B because large-rm auditors (the focus group) display less apprehensionabout harmful effects of providing NAS than all other practitioners (the comparison group). The chi-square test for Panel C is signicant (p = .027), supporting H3. The combined results of Table 5 are con-sistent with the theory that control systems in large accounting rms encourage practitioners to statepositions consistent with their rms interests (Covaleski et al., 1998), as well as the theory that audi-tors draw upon professional ethics as a source of power in relationships with clients (Goldman andBarlev, 1974).

Table 6 reports changed answers to the non-audit fees question after reading the summary para-graph. Fewer large-rm practitioners changed answers than small-rm practitioners (11% versus20%, Panel A), fewer auditors changed than non-auditors (14% versus 18%, Panel B), and fewerlarge-rm auditors changed answers compared to all other practitioners (14% versus 17%, Panel C).However, the only signicant difference was the rm-size effect (Panel A, p = .029), limiting supportto H4.15,16 This may be due in part to the response options for the fees question, which were quartiles

15 The most common answer change for the fees question, 49% of the total changes (25 of 51),was from do not know to one of the4% ranges.16 The questionnaire also included ten Likert scale questions asking for level of agreement that providing specic NAS (e.g.,consulting, internal audit) reduces auditor independence. As with the two multiple-choice questions, these questions were askedbefore and after the summary paragraph. Practitioner type did not generally affect responses or changes in responses to thesequestions.

366 P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373Table 4(125% of total rm fees are non-audit fees, etc.). Respondents may not have been able to record changesin their beliefs in these relatively wide ranges.

Direction of changes in answer to impairment question.

Small-rm non-auditors

Small-rmauditors

Large-rm non-auditors

Large-rmauditors

Summary concludes independence is impairedConsistent changea 15 2 3 1Inconsistent change 2 0 0 0

Summary concludes independence not impairedConsistent change 7 2 1 0Inconsistent change 2 0 1 1

Summary of both articlesChange to impairmentb 2 0 2 2Change from

impairment6 1 0 0

Total changes 34 5 7 4

a A consistent change occurs when an uncommitted answer, or an answer contrary to the studys conclusion, is changed toan answer consistent with the conclusion. An inconsistent change occurs when an uncommitted answer is changed to aninconsistent answer, or an answer consistent with the studys conclusion is changed to an uncommitted or inconsistentanswer.

b In this version two papers were summarized, one concluding that NAS may impair independence and the other thatindependence is not impaired. Change to impairment means that an answer was changed from uncommitted, or that NAS donot impair independence, to the opinion that NAS do impair independence. Change from impairment indicates a change in theopposite direction.

Table 5Responses to rst non-audit fees question on percentage of fees that would likely compromise independence.

Panel A: Effect of rm size (chi-square p value = .000)Small-rm auditors and non-auditors (n = 193) (%)

Large-rm auditors andnon-auditors (n = 122) (%)

125% 24 92650% 22 115175% 14 2176100% 7 11Do not know 33 48Total 100 100

Panel B: Effect of audit specialization (chi-square p value = .055)Non-auditors in small and largerms (n = 216) (%)

Auditors in small and largerms (n = 99) (%)

125% 21 112650% 20 135175% 15 2276100% 7 10Do not know 37 43Total 100 100

Panel C: Large-rm auditors versus all other practitioners (chi-square p value = .027)Non-auditors in all rms andauditors in small rms (n = 243) (%)

Auditors in large rms(n = 72) (%)

125% 21 72650% 20 145175% 15 2276100% 8 8Do not know 36 49Total 100 100

Table 6Changes in answer to non-audit fees question after reading summary paragraph.

P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373 367Panel A: Effect of rm size (chi-square pvalue = .029)

Small-rm auditors and non-auditors(n = 187) (%)

Large-rm auditors and non-auditors (n = 107) (%)

Did not change answera 80 89Changed answer 20 11Total 100 100

Panel B: Effect of audit specialization (chi-squarep value = .453)

Non-auditors in small and large rms(n = 209) (%)

Auditors in small and largerms (n = 98) (%)

Did not change answer 82 86Changed answer 18 14Total 100 100

Panel C: Large-rm auditors versus all otherpractitioners (chi-square p value = .514)

Non-auditors in all rms and auditors Auditors in large rms4.1. Additional analysis of written responses

At the end of the questionnaire in Part D, respondents were asked to explain why the summary par-agraph affected or did not affect their opinion about effects of accepting non-audit fess upon auditorindependence; 169 wrote responses, which are organized into six categories in Table 7. One-third (58)wrote no informative answers, stating only that their opinions had not changed; the summary did notaffect them; or NAS affect on independence depends, without specifying upon what; but 60 disclosedwhy NAS affects varies or stated their opinions on the topic. Many mentioned the amount of audit ornon-audit fees or the scope and type of NAS as causing the varying effects. Two responses referredexplicitly to the advantages of not allowing the audit team to perform NAS. Only one respondent sta-ted ethics specically (my ethical responsibilities keep me from being affected), but another ninediscussed the role of integrity or punishment of individuals who have hurt the profession, consistentwith Goldman and Barlevs (1974) thesis about the role of professional ethical standards.17 Appendix Bpresents a synopsis of the written responses from Table 7.

in SMALL rms (n = 236) (%) (n = 71) (%)Did not change answer 83 86Changed answer 17 14Total 100 100

a Changed answers are dened as any change between any of the response categories: 125%, 2650%, 5175%, 76100%, anddo not know.

Table 7Classication of written responses regarding effects of the summary on opinions upon readingthe Frankel, Johnson, and Nelson or Ashbaugh, LaFond and Mayhew summaries.

Did not change opinion or said that summary did not affect it 48Said that effect of NAS depends, but did not specify upon what 10Said it depends, and disclosed how they dene it dependsa 20Stated beliefs about the effect of NAS on independence 40Criticized the paper or summary of it 31Miscellaneous 20Total 169

a A synopsis of responses in this and the remaining three categories of Table 7 appears inAppendix B.

17 As shown in Table 7, 31 respondents criticized the paper as summarized. Criticisms included that (1) they needed moreinformation about the 3000 sample rms; (2) earnings management could not be captured by the extent of discretionary accruals;(3) a causal relationship was not proven; and (4) the research was biased.

There is no new evidence, research, or congressional nding that would serve as support for theCommission now to eliminate those limited exceptions to the prohibition on appraisal and valua-tion services that were carved out as part of the 2000 rulemaking.

Statements like this carry public policy consequences to the extent that policymakers rely uponsuch assertions by accounting rms about research, including that done by academics. Our objectiveis to show that these assertions are not necessarily due to practitioners passive ignorance of research;active processes contribute to their publicly stated opinions. Large rms have lobbied against restrict-ing provision of NAS to audit clients and have control systems that encourage their members to avowthis organizational imperative as their own (Covaleski et al., 1998). We thus predict and nd thatlarge-rm practitioners are less likely to report beliefs that non-audit fees impair auditor indepen-dence than practitioners in small rms. Large-rm practitioners are also less likely to report beliefsthat relatively lower ratios of non-audit to total fees are needed to compromise independence thansmall-rm practitioners.

Ethical standards are a source of power to help auditors resist client pressures (Goldman and Bar-lev, 1974). Personal experience with such standards and rms procedural independence guidelinesshould make auditors less likely to report beliefs that non-audit fees impair independence thannon-auditors. Results supported this hypothesis for two questions, one requesting an opinion aboutimpairment in general and the other a ratio of non-audit to total audit rm fees that would compro-mise auditors independence. We also predicted that large-rm auditors are less likely to report beliefsthat non-audit fees impair independence than all other practitioners, because they experience large-rm control systems (Covaleski et al., 1998) and perceive that professional ethics support them inpower relationships with audit clients (Goldman and Barlev, 1974). This hypothesis was supportedfor both this and the fee ratio question.

We also examine belief persistence, the tendency to maintain prior positions when confronted withnew evidence, and claim that large-rm practitioners and auditors have the stronger motivations topersevere in their beliefs than small-rm practitioners and non-auditors respectively. Practitionerswere asked to read such evidence in the form of summaries of papers concluding that provision of5. Conclusions

The SEC (2003b) received only two comment letters directly from accounting academics regard-ing the auditor independence sections of the SOX: Geiger (December 12, 2002) and Kinney et al.(January 7, 2003), both of which referred to their working papers on independence. Deloitte andTouches January 7, 2003 comment letter cited Kinneys paper (later published as Kinney et al.(2004)) to support its position that the Act should not prohibit tax services. Kinney et al. (2004)found that rms paying higher tax services fees experienced fewer nancial restatements. Regardingconicts of interest resulting from employment relationships, Deloitte and Touches comment letteragreed there should be support mechanisms, but argued that the scope of issuers employment rela-tionships affected by the Act should be more restricted. However, unlike its discussion of tax ser-vices and the Kinney et al. (2003) comment letter, in the case of employment relationshipsDeloitte and Touche did not cite Geigers comment letter, which was led almost a month earlier.The related paper, later published as Geiger et al. (2005), found higher levels of discretionary accru-als by rms that hired CFOs, VPs-Finance, and Controllers from their current auditor than rms hir-ing from elsewhere.

This is precisely the differential treatment of research evidence by practitioners addressed in thispaper. There may not appear to be public policy consequences because both research papers had beenled by their authors via comment letters, but normally unpublished and published research is notentered directly into the public record by authors. It is much more common for public accountingrms to comment on the state of research in general without citing specic studies. This is the ap-proach seen below in the section of the Deloitte and Touche (2003, p. 20) comment letter dealing withprohibitions on appraisal or valuation services.

368 P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373NAS appeared to impair independence (Frankel et al., 2002), not to affect independence (Ashbaugh

should respond with appropriate safeguards, including complaint systems that encourage employees,clients and the public to report unethical behavior. Practitioners will need to adopt a new ethics mind-

growing support for greater regulation of the nancial sector (Jackson et al., 2008; Lueck, 2008;

Scannell et al., 2008). If a pro-regulation climate extends to the whole economy, it may trigger re-newed interest in SOX-style restrictions at federal and state levels. In this climate incentives foraccounting rms and their professionals to maintain continuity in their reported beliefs, and treatresearch accordingly, would increase. Academics wishing to serve the public interest better couldfollow the example of Geiger (2002) and Kinney et al. (2003) and le their papers directly withthe authorities.

Acknowledgements

We are grateful for the input from Abe Akresh (Government Accountability Ofce), Michael Wright(University of Calgary), Steve Moehrle (University of Missouri, St. Louis), Mohammad Abdolmoham-madi (Bentley College), Brian Green (University of Michigan, Dearborn), Cathy Miller (Wayne StateUniversity), Greg Trompeter (Boston College), Julia Higgs (Florida Atlantic University), Phil Reckers(Arizona State University), Michael Grayson (Jackson State University), Kurt Pany (Arizona State Uni-versity), Ed Swanson (Texas A & M University) and Benzie Barlev (Hebrew University).

Appendix A

A.1. Summary of Frankel et al. (2002)

A recent article in The Accounting Review nds that auditors are less independent when their clientspurchase more non-audit services. The article analyzed the ratio of non-audit to audit fees paid by asample of 3074 American rms. Clients paying higher such ratios might be able to exert more inu-ence over their auditors, thus compromising auditor independence. Earnings management at theserms, which refers to an optimistic bias in earnings, was measured as the amount of income-increas-ing accruals (over which management had some discretion to report in nancial statements). The arti-cle found that rms paying higher ratios of non-audit to audit fees tended to display greater earningsmanagement, indicating that auditors are less independent when their clients purchase a higher pro-set consistent with this threats-and-safeguards approach (Leibowitz and Reinstein, 2009), a processthat will likely take years to complete and may affect their reported opinions about threats to auditorindependence.

With respect to increased regulation, to date the cascade effect of SOX has not been dramatic.Gantt et al. (2007) analyzed legislation prohibiting provision of NAS to audit clients enacted in vestates and found that although state authorities may enact stricter rules than in SOX, only one state(California) did so. Most states adopted a wait and see attitude regarding progress of federal leg-islation (Gantt et al., 2007). However, with the downturn in the American economy in 2008 there iset al., 2003), or supporting either conclusion. Small-rm practitioners were comparatively receptive tothe summaries; 20% of them changed their responses to both the impairment question and the feequestion. Large-rm practitioners changed answers signicantly less often, 9% of them for the impair-ment question and 11% for the fee question. Changes in reported beliefs regarding both questions weresimilar for auditors compared to non-auditors, and large-rm auditors (who have the strongest moti-vations to persistently report the same beliefs) compared to all other practitioners.

Effects on public policy depend on the uid nature of professional ethics and safeguards, regulation,and the economy. Regarding ethics, the AICPA (2006) passed a principles-based conceptual frameworkfor independence standards that is consistent with the International Ethics Standards Board forAccountants (IESBA) Code of Ethics for Professional Accountants (IFAC, 2007). The AICPA frameworkcalls upon practitioners to identify threats to auditor independence, such as the threat that an auditorwill advocate on a clients behalf to the point of compromising objectivity. Public accounting rms

P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373 369portion of non-audit services.

370 P. Beaulieu, A. Reinstein / J. Account. Public Policy 29 (2010) 353373A.2. Summary of Ashbaugh et al. (2003)

A recent article in The Accounting Review nds that the independence of auditors is unaffectedwhen their clients purchase more non-audit services. The article analyzed the ratio of non-audit toaudit fees paid by a sample of 3170 American rms. Clients paying higher such ratios might be ableto exert more inuence over their auditors, thus compromising auditor independence. Earnings man-agement at these rms, which refers to an optimistic bias in earnings, was measured as the amount ofincome-increasing accruals (over which management had some discretion to report in nancial state-ments). The article found no relationship between the ratio of non-audit to audit fees and earningsmanagement, indicating that auditors are not less independent when their clients purchase a higherproportion of non-audit services.

A.3. Summary of both Frankel et al. (2002) and Ashbaugh et al. (2003)

Two recent articles in The Accounting Review examined the effect of non-audit services on auditorindependence. Both articles analyzed the ratio of non-audit to audit fees paid by samples of about3000 American rms. Clients paying higher such ratios might be able to exert more inuence overtheir auditors, thus compromising auditor independence. Earnings management at these rms, whichrefers to an optimistic bias in earnings, was measured in both articles as the amount of income-increasing accruals (over which management had some discretion to report in nancial statements).One article found that rms paying higher ratios of non-audit to audit fees tended to display greaterearnings management, indicating that auditors are less independent when their clients purchase ahigher proportion of non-audit services. The other article found no relationship between audit fee ra-tios and earnings management, indicating that auditors are not less independent when their clientspurchase a higher proportion of non-audit services. The difference in the results of the two papersis due to the fact that one of them adjusted for rm performance in the statistical analysis.

Appendix B. Synopsis of written comments

In Table 7, 20 respondents said the effect of NAS on independence depends, and disclosed how theydene it depends. Following is a synopsis of their comments.

1. Depends on scope of services provided.2. It is harder to be independent when the client provides a lot of revenue.3. NAS affect independence, except for tax services.4. Depends on the mindset of the engagement team willing to take rm stances in spite of

consequences.5. There can be an effect on judgments when client fee base is higher on both audit and non-audit

fees.6. On judgmental items, whether more liberal interpretations are allowed versus a more stringent

answer.7. It depends on who performs services audit team or other professionals.8. Depends on integrity of auditors regardless of NAS.9. NAS affect independence but question is where do NAS become material enough to affect inde-

pendence. Also, outsourcing NAS to other accounting rms also affects independence if non-audit rm depends on audit rm economically.

10. Ratio of non-audit fees to audit fees matters less than ratio of total client fees to total fees ofpartner, ofce, or rm.

11. Depends on type of NAS and total fees collected from client (does not specify NAS).12. NAS can affect independence when fees are a signicant portion of total fees.13. Depends on whether audit team members perform the NAS.14. If NAS relate to numbers that we audit, independence may be impacted.15. Services that affect independence are numbers 4, 5, 9, and 10 on the Likert scale questions.16. Independence would be impaired if auditors perform any kind of management function at the

client.17. Realistically, fees are difcult to separate from scope of audit and client relationship overall.

Accounting Review but plastered across billboards, newspapers, and TV broadcasts so the publicperception can be in line with what actually occurs related to auditor independence from clients.

3713. AICPA should not let denition of independence be dened by the reasonable investor community.4. Even if not material to the audit rm NAS fees will affect individual partner compensation.5. Companies spending on NAS tend to be aggressive and cutting edge and will seek earnings man-

agement regardless of who performed the NAS, audit or non-audit rm.6. CPAs believe themselves independent but do not hold to a higher standard. They are not intention-

ally deceptive.7. If auditor has integrity fees do not matter.8. Weed out individuals who have hurt the profession.

In Table 7, 31 respondents criticized the article(s) and/or the summary. Many comments were gen-eral, stating for example that the study was awed. Following are 10 specic comments.

1. A causal relationship was not proven.2. Earnings management cannot be captured by the extent of discretionary accruals.3. More information about the 3000 sample rms was needed.4. Hard to believe paragraph was unbiased.5. The summary is an academic analysis that ignores the human element.6. TAR is an ivory tower publication with no relevance.7. Did not believe the study or results measure independence.8. Could not tell how the study measured income-increasing accruals.9. You cannot detect a weak auditor by studying accrual accounts.10. Larger companies have more discretionary dollars to spend. Larger companies have more dis-

cretion in nancial reporting. Therefore, overall conclusion of author is awed.

In Table 7, 20 respondents are classied as miscellaneous. Some of them repeated portions of thesummary. Some described their work or business, e.g., I work for smaller businesses that need NASor I do not do audits.

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Belief perseverance among accounting practitioners regarding the effect of non-audit services on auditor independenceIntroductionLiterature review and hypothesis developmentAuditor independence and non-audit servicesPractitioners stated beliefs about auditor independence and non-audit services [NAS]Differential belief perseverance

MethodQuestionnaire developmentSurvey method

ResultsAdditional analysis of written responses

ConclusionsAcknowledgementsAppendix ASummary of Frankel et al. (2002)Summary of Ashbaugh et al. (2003)Summary of both Frankel et al. (2002) and Ashbaugh et al. (2003)

Synopsis of written commentsReferences