Audit Fees and Accounting Quality: Inferences from Single-Period versus Multi-Period Perspectives

• In Event: Audit Fees, Non-audit Fees, and Audit Effort
  In Paper Session: Audit Fees, Non-Audit Fees, and Audit Effort

Abstract

We provide the first evidence of how links between audit fees and measures of accounting quality are dependent on the length of time over which such associations are observed. In contrast to prior research where the association between audit fees and accounting quality is measured year-by-year, we argue that the association between audit fees and measures of reporting quality will be dependent on controlling for longer-term measures of audit fees. Our results strongly support this view. In models that include both annual and longer term (5 year average) measures of abnormal audit fees, we find that higher annual excess fees are generally associated with lower accounting quality, while a measure that reflects consistently high audit fees is associated with higher accounting quality. This result is consistent with a positive long-run relationship between audit quality and audit fees, and is also consistent with firms making an investment in verification to signal higher accounting quality (i.e., the investment in auditing and financial reporting quality are compliments). The evidence we provide also gives weight to the view that prior evidence linking audit fees with measures of accounting quality may not yield reliable evidence of either audit effort or auditor independence effects.

Authors

• Jeffrey J. Coulton, The University of New South Wales

• Gilad Livne, Cass Business School

• Angela Pettinicchio, Universita Bocconi

• Stephen L Taylor, University of Technology-Sydney