The Impact of Nonaudit Services Fee Levels on Investor Perceptions of Auditor Independence, Market Efficiency, and Wealth Distribution

We use experimental markets to examine the impact of proportionate levels of nonaudit fees on investor perceptions of auditor independence and market behavior. Consistent with Dopuch et al. (2003), we find disclosure of nonaudit fees reduces the accuracy of investor perceptions of auditor independence. More importantly, we document the level of nonaudit fees has a varying impact on investor perception of auditor independence and market behavior. In particular, there appears to be an asymptotic effect when the level of nonaudit fees are disclosed, wherein investor perception of auditor independence and market behavior remains unchanged when the level of nonaudit fees equals or exceeds total audit fees. In summary, when investors perceive auditor independence is impaired as a result of the level of nonaudit fees, they are more likely to invest less confidently, pricing is less efficient and profits are less uniformly distributed across investors.