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Investor confidence regarding the reliability of financial statements is absolutely critical for publicly traded companies. The bankruptcy of Enron has brought to the forefront the issue of auditor independence and financial statement reliability. As a response to the criticism that the growth in consulting services by CPA firms was leading to a conflict of interest and significantly hindering auditor independence, the SEC approved new auditor independence regulations that required publicly traded firms to disclose the level of fees that were paid to their external auditor for non-audit services. This paper investigates the impact that the Enron collapse has had on investor perceptions about auditor independence and financial statement reliability. Using data from proxy statements concerning non-audit fees paid to external auditors, we find evidence that auditor independence and therefore financial statement reliability are compromised by the provision of these non-audit services. The results indicate that in the wake of the Enron revelations, investors perceive financial statements as being less reliable and thus require an additional risk premium, which translates into lower stock prices and a loss of firm value. We also find that there is negative relationship between the extent to which firms use non-audit services and the negative abnormal returns they suffered during the Enron collapse.

The Impact Of Non-Audit Fees Disclosures On Company Value Following The Enron Collapse