This study aims to explore the impact of material nonaudit services on audit quality under the new disclosure threshold regime of nonaudit services. To address this issue, we investigate firms traded during 2006-2007 on the Taiwan Stock Exchange Market or on the GreTai Securities Market and use discretionary accruals as the proxy of audit quality. After controlling for potentially confounding factors, our findings demonstrate that firms with material nonaudit services have higher positive discretionary accruals than firms without material nonaudit services, indicating that auditors allow their clients to manage reported earnings upward in the case of providing material non-audit services. In addition, this study shows that discretionary accruals of companies with material nonaudit services are negatively associated with nonaudit-service fees. Such a result signals that material nonaudit services can produce knowledge overflow effects, which improve auditors' competence and thus reduce the severity of earnings manipulation.