THE MARKET FOR AUDIT SERVICES AND S&P 500 INDEX CLIENTS

Literature on S&P 500 index firms shows that there is significant improvement in the performance due to increased scrutiny of media and investors. Recently Platikonova (2008) documents improvement in the disclosure quality for firms following their inclusion in the index. Since, auditors are responsible for certifying the quality of reporting and the audit fee reflects their perception of earnings quality, we examine whether the improvement in the reporting due to S&P scrutiny is reflected in audit fees. Our analysis shows that audit fees are significantly lower for S&P firms. This suggests that auditors believe that the quality of reporting improves for firms when they enter S&P index. Our further investigation shows that this reduction in fees is higher for firms that stay in the index for longer time. This shows that auditors consider the time length of a firm in the index while providing the discount. Lastly, we find that expert auditor to less likely lowball their fees for S&P clients. In fact we find expert auditors to charge higher fees for auditing S&P firms. Overall we conclude that S&P index scrutiny not only improves firm’s performance but also improves firms reporting.