Contemporary Accounting Research Vol. 24 No. 2 (Summer 2007) pp. 467–87 © CAAA Do Auditor-Provided Nonaudit Services Improve Audit Effectiveness?* JENNIFER R. JOE, Georgia State University SCOTT D. VANDERVELDE, University of South Carolina 1. Introduction In recent years, there has been a heated debate over whether auditors should be allowed to provide any nonaudit services to their audit clients. 1 Public accounting firms and other proponents of auditor-provided nonaudit services argue that perform- ing both audit and nonaudit services for the same client increases audit effectiveness and audit efficiency because it promotes a more comprehensive understanding of the client. For example, Terry Strange, global managing partner of KPMG, argues that “non-audit services enhance audit effectiveness” (cf. Norris 2000). However, opponents of auditor-provided nonaudit services, many of whom advocate a com- plete ban on such services, argue that acting in a dual capacity as auditor and consultant/adviser compromises auditor independence and objectivity. Bazerman, Loewenstein, and Moore (2002) argue that the structural aspects of accounting and characteristics of human nature can cause unconscious bias in an auditor’s judge- ments in the direction of the client’s preferences. Bazerman et al. point out that performing nonaudit services for audit clients increases the auditor’s attachment to that client, leading to bias in judgement. Former Securities and Exchange Com- mission (SEC) chairman Arthur Levitt expresses a similar sentiment: “I think that any kind of consulting in this environment makes the audit look at least in ques- tion” (cf. Revell and Burke 2003). Many users of audit reports also share this view. According to a survey of financial analysts, 83 percent of analysts believe that “objectivity is threatened even when the non-audit fee is less than the audit fee” (emphasis added) (SEC 2001). In this paper, we use an experiment to investigate (a) whether knowledge gained from working on a nonaudit task can be transferred to enhance the perfor- mance of audit tasks, and (b) whether any knowledge transfer can be achieved if the auditor only reviews the nonaudit workpapers prepared by nonaudit staff in the same audit firm or a different audit firm. Thus, this study focuses on the cognitive * Accepted by Steve Salterio. This paper benefited from helpful comments from Michael Cipriano, Christine Earley, Craig Emby, Audrey Gramling, Vicky Hoffman, William Kinney, Jr., Robert Libby, Steve Salterio, Gregory Trompeter, Richard Tubbs, Yi-Jing Wu, Arnold Wright, two anony- mous reviewers, workshop participants at Boston College, Georgia State University, University of South Florida, and the Sydney Winter Lecture Series at the University of Iowa and participants at the 2005 American Accounting Association Auditing Section Midyear and Annual Meetings. We thank Jennifer Kahle and Rini Laksmana for their assistance in administering the experiment.