Accounting watchdogs have long warned that providing nonaudit services can compromise an auditor's independence. Now they have some numbers to support their case. In a new study, researchers at MIT, Michigan State University and Stanford conclude that auditors are more likely to condone earnings management when audit clients pay large nonaudit fees.The relationship between earnings quality and nonaudit services has generated concern since the 1970s, when the U.S. Congress first considered limiting the services that auditors could provide. Since then, interest in the issue has intensified in response to two trends: the rapid growth of auditors providing nonaudit services and the emergence of shareholder value as the dominant yardstick by which companies are judged. Between 1993 and 1999, the use of nonaudit services, such as management and information systems consulting, increased at an annual rate of 26%, compared to 9% for audits. During that same period, the growing obsession with stock market performance — initially applauded for increasing CEO accountability —began to show its flaws. Critics worried that unscrupulous executives would do whatever it took to drive up their company's share price, just as auditors' incentives were becoming increasingly stacked in favor of turning a blind eye.I
