Data Availability: Data used in this study are available from the authors upon request. THE RELATIONSHIP BETWEEN NONAUDIT SERVICES AND PERCEIVED AUDITOR INDEPENDENCE SYNOPSIS

Recent expansion of nonaudit services (NAS) by public accounting firms has caused the Securities and Exchange Commission (SEC) to question whether auditors can remain independent of their clients to whom they provide both audit and NAS. However, as evidenced by the debate surrounding the SEC’s recent restrictions on the provision of NAS, some disagree, contending that these services strengthen the auditor’s independence. This study examined how the performance of NAS influences the perceptions of auditor independence held by investors, professionals from non-Big 5 CPA firms and professionals from Big 5 CPA firms. The materiality of the NAS fee and the type of NAS performed were varied. Results indicated that NAS had a positive influence on participants ’ perceptions of auditor independence, consistent with the contention that such services enhance auditor independence. Not surprisingly, Big 5 CPA firm professionals consistently rated auditor independence significantly higher than either non-Big 5 CPA firm professionals or investors. Finally, investors favored disclosure of the provision of NAS, while CPA firm professionals favored disclosure of the amount of NAS only if those services exceeded a specified threshold