Audit, Nonaudit, and Information Technology Fees: Some Empirical Evidence

Abstract

This study examines the purchase of nonaudit services by SEC audit clients. Effective February 5, 2001, the SEC has required the disclosure and description of audit, nonaudit, and information technology fees paid to the incumbent auditor. The SEC enacted this rule due to concerns about auditor independence. Our study reviews these disclosed fees contained in the proxy statements of 2,795 firms since the effective date of the new SEC disclosure rules. The results indicate that the actual incidence and magnitude of nonaudit fees is much greater than the information relied upon during the SEC rule-making deliberations. Consequently, our study calls into question the data used during SEC rule-making process, as well as the clarity of the current audit and nonaudit service distinctions. Our results also suggest that the nonaudit service landscape has changed dramatically since the last period of publicly available fee data (1978–1981). Our results provide at least two public policy implications. First, the SEC should maintain, at a minimum, the current disclosure environment. Second, the SEC should strive to improve the clarity and granularity of the disclosures. Our results also indicate a clear need for additional research regarding the provision of nonaudit services.