Do Auditors Care About Aggressive Gains Trading?

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 4: Audit Fees

Abstract

We examine the relationship between aggressive gains trading and current and future audit fees in the banking industry. Understanding whether auditors’ price gains trading is particularly timely in the wake of the most recent FASB proposal to eliminate the available for sale classification option for equity instruments (ASU 2016-01), which constrains the ability to gains trade equity securities. Recent studies document a positive association between audit fees and other more broad forms of REM (Sohn 2011; Hong et al. 2014; and Greiner et al. 2016), but eliminate the banking industry from their analysis and do not specifically examine whether auditors price risks associated with gains trading. Despite the relative ease of auditing realized sales of securities and the added layer of monitoring provided by the bank regulator, we find that aggressive gains trading is positively associated with both current and future audit fees. This finding is consistent with the auditor viewing aggressive gains trading as an indicator of increased business risk and pricing it accordingly. We further find that the fee increase is lower for clients of bank specialist auditors, consistent with the specialist auditor being able to more efficiently address the specific risks posed by aggressive gains trading.

Authors

• Adam Greiner, University of Denver

• Mark Kohlbeck, Florida Atlantic University - Boca

• Thomas Joseph Smith, University of South Florida