Do Nonaudit Services Attract Regulatory Scrutiny?

SUMMARY We examine whether the SEC and PCAOB scrutiny of audit clients and their auditors is associated with nonaudit services (NAS) to those clients. We find that NAS fees paid by audit clients are positively associated with the likelihood of receiving an SEC comment letter, the number of accounting-related comments, and the volume of client filings downloaded by the SEC from EDGAR. Furthermore, NAS fees are positively associated with the number of days to resolve the comments raised, consistent with higher remediation costs. Similarly, the PCAOB inspects more clients and downloads more from EDGAR filings of clients of large auditors who receive a higher proportion of NAS fees than total fees, suggesting increased regulatory scrutiny. Overall, our results suggest that NAS draw scrutiny from regulators and highlight the potential hidden costs of purchasing NAS from external auditors. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M40; M42.