Audit Fee Decreases and Changes in Clients’ Financial Reporting Quality

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 6: Financial Reporting Quality

Abstract

The period following the Sarbanes-Oxley Act of 2002 has seen dramatic changes in audit fees, with many expressing concern that a reduction in audit fees may influence how audit firms conduct their audits and potentially have negative consequences for companies and investors. Consistent with this concern, we examine whether audit fee decreases are associated with subsequent changes in clients’ financial reporting quality. We find that audit fee decreases are associated with subsequent decreases in financial reporting quality, as reflected by significant increases in discretionary accruals. Additional analyses indicate that this association persists beyond the 2007 – 2009 financial crisis period and that clients with large changes in audit fees have more pronounced changes in financial reporting quality.

Authors

• Brian Todd Carver, Clemson University

• Carl W. Hollingsworth, Clemson University

• Jim Irving, Clemson University