Do the Auditor Conformity within a Holding Company and the Provision of Non-Audit Services Affect the Earnings Quality of a Holding Company?

This study empirically examines the effect of the auditor conformity and provision of non-audit services by the identical auditor on earnings quality of a holding company. Auditors of holding company may request identical auditors among the holding company and son companies for audit efficiency. The demand for auditor conformity may also be supported by the managers of holding company because auditor conformity can be one of the effective means to reduce monitoring costs from having different auditors. The movement towards auditor conformity is accelerated by the implementation of the IFRS and the adoption of the New International Standards on Auditing (New ISA). If identical auditors audit the holding company, the costs for transferring the information, knowhow, and experiences can be reduced. Now that it can cause the efficiency of auditing, the holding company with identical auditors can have higher earnings quality than those are not. However, if the auditor conformity is occurred by the competition among the audit companies, these types of auditor conformity are tied with economic bonding. Since there is a harsh competition about audit fees among the audit companies, auditors may not be able to raise the audit fees and as an alternative, auditors may decrease the degree of their audit effort. Naturally, poor audit due to low audit fees can cause a decrease in overall earnings quality. In reality, even though there are restrictions on performing some of the non-audit services by identical auditors, there is still a significant amount of non-audit service fees paid to identical auditors. The regulatory and other proponents of auditorprovided NAS argue that implementing both audit and non-audit services for the same client increases audit effectiveness and audit efficiency because it helps to have more comprehensive understanding of the client. However, counterparties, that advocate complete ban on non-audit services, are arguing that performing in a dual capacity as auditor and consultant compromises auditor independence and objectivity. So it is the empirical question whether identification of audit engagement and auditors with providing non-audit service can affect earnings quality within the holding company. Our empirical results are as follows. First, upward discretionary accrual increases are shown as the increase in the degree of auditor conformity. In detail, in case of the identification of audit engagement, the holding company becomes more important customer to them. Newly formed economic bond, between the auditor and the audited, is the main cause for decline in the earnings quality within the holding company. Second, although, we expected to see that identical auditors, simultaneously providing non-audit services, are related to the change in the earnings quality within the holding company, no significant results were given. Possible reasons for these results are limited samples of this study and the use of aggregate measure of non-audit services. In the future, we will try to collect more detailed samples including non-listed companies and investigate the second hypothesis using detailed measures such as tax-related non-audit services and IFRS-related non-audit services. Overall, the results of this study show that earnings quality within the holding company has not been improved in spite of the monitoring by the auditors. It is difficult to find neutral auditors because external audit market is very competitive. Therefore, this study implies that capital market and regulatory bodies should monitor the holding company and auditors faithfully so that it can actually lead to improvement in corporate governance.