Prominent Audit Clients and the Relation between Discretionary Accruals and Non-Audit Service Fees

Using a matched-pair design, we find that for S&P 500 firms, higher proportions of non-audit fees are associated with higher income-increasing accruals; however, this result is not robust to alternative fee measures. For a group of matching small firms, higher fees paid to auditors are associated with higher levels of income-decreasing discretionary accruals (i.e., lead to more negative discretionary accruals). We conclude that (1) the relation between discretionary accruals and fees paid to auditors differs for prominent and less-prominent audit clients, and (2) auditors appear to be more conservative with their less-prominent audit clients from whom they receive large fees.