The association between non-audit service purchases and managers' compensation structure

The rise of fees paid to incumbent auditors for non-audit services (NAS) relative to audit fees has been actively debated by the Securities and Exchange Commission, the accounting profession, investors, and others. Despite the negative publicity generated by NAS purchases, why do managers continue to purchase increasing quantities of NAS? We contribute to this debate by identifying an important determinant of NAS purchase decisions – the way top managers are compensated. By examining non-audit fees data and compensation data compiled from proxy statements, we find a positive association between NAS purchases and the proportion of performance-based compensation paid to the top five executives. Our findings are consistent with NAS purchases favorably impacting firm performance and consequently enhancing managers’ compensation.