George Mason UniversitySchool of Business

Faculty Research Focus: Do Accounting Firm Consulting Revenues Affect Audit Quality?

Written by Jennifer Anzaldi on .

robert pawlewiczPublic accounting firms have been experiencing a steady increase in revenues generated from consulting services in recent years, primarily from non-audit clients. Concern has been expressed by the industry about potential implications of this increase based on audit quality, but the question remains, is this concern warranted?

Robert Pawlewicz, assistant professor of accounting, recently published an article on this topic in the premier journal, Contemporary Accounting Research. The article, “Do Accounting Firm Consulting Revenues Affect Audit Quality? Evidence from the Pre- and Post-SOX Eras” was coauthored with Ling Lisic from Virginia Tech, Linda Myers from the University of Tennessee, and Timothy Seidel from Brigham Young University.


What is your research about?

This paper investigates whether the proportion of revenue that a public accounting firm generates from selling consulting services is associated with differences in audit quality across firms, and if investors perceive a difference in audit quality across firms. Regulators, investors, and business media have long voiced concerns over whether public accounting firms focus on consulting distracts them from their main role as auditors, diverting attention and resources within firms away from the audit business to the consulting business.

My co-authors and I find evidence that, before the Sarbanes-Oxley Act of 2002 (SOX), which instituted regulatory oversight for public accounting firms and restricted some of their businesses, more consulting revenue was associated with both lower audit quality and investor perceptions of audit quality. After SOX this association evaporates and, even with the re-growth of consulting practices at public accounting firms over the past few years, we find no evidence of impaired audit quality associated with more consulting.

What inspired you to focus on this topic?

In my professional career before I entered academia, I served as both a consultant and an auditor at a Big 4 public accounting firm (Ernst & Young LLP). I had seen the interplay between audit and consulting services, but was unsure if they had a detrimental or beneficial relationship. This project grew out of this curiosity.

How does this research benefit the business community?

This paper provides evidence that concerns about dual-service firms may be misplaced. In my opinion, the restriction of selling certain non-audit services to audit clients, quality control mechanisms at the firms, the oversight of the Public Company Accounting Oversight Board (PCAOB), along with the demands of the public accounting profession have protected audit quality from the influence of consulting services.

What are the most important points of your research?

This research was based on publicly available data on public accounting firm revenues and audit quality over a long period of time (2000 - 2013). While our evidence and conclusions are not the final word in the debate, my co-authors and I believe that we have provided valuable insights for an important unanswered question for the accounting profession.

Pawlewicz's research interests include auditing and the effect of regulation on the content and investor responses to financial reports. He has published research in Contemporary Accounting Research, Auditing: A Journal of Practice and Theory, Harvard Educational Review, and Current Issues in Auditing. He has presented papers at numerous local, national and international conferences and been an invited speaker at universities across the country.