Capital Markets CRC Ltd.

We examine whether the provision of nonaudit services (NAS) by incumbent auditors is associated with a reduction in the extent to which earnings reflect bad news on a timely basis (that is, news-based conservatism). Reduced conservatism is expected to occur if relatively high levels of NAS result in reduced auditor independence and, ultimately, lower-quality auditing. Because client-specific demand for NAS is expected to vary, our proxy for the auditor–client economic bond is the extent to which NAS purchases (relative to audit fees) are greater or less than based conservatism, we associated with reduced demand, as well as sever vatism. Similar conclusi bond between auditors a non–Big 6 audit firms. O tives, the threat of litig expected benefits to the that recent legislative i