The Relationship between Segment-Level Manipulations and Audit Fees

• In Event: Determinants of Audit Fees

Abstract

We investigate the relation between audit fees and segment level-manipulations, a type of earnings management. This earnings management technique involves shifting costs between the core segments (considered more permanent) and the tertiary segments (considered transitory) in order to present stronger core segment performance. We find that audit fees have a positive association with the extent of segment-level manipulations. Using audit lag as a proxy for effort, subsequent analyses suggest that auditors also perform additional work in the presence (or detection) of segment-manipulations. Finally, we consider whether the auditors are justified in charging higher fees to client that engage in segment manipulations. We document weak evidence of a positive association between restatements and the segment-level manipulations supporting the need for additional work by auditors and the resulting higher fees.

Authors

• Jason E MacGregor, Baylor University

• David N Hurtt, Baylor University

• Bradley E Lail, Baylor University