Abnormal Audit Fees and Audit Quality: Evidence from the Korean Audit Market

• In Event: Journal of International Accounting Research Plenary Presentations

Abstract

Does abnormally high or low audit fees affect audit quality? Prior literature examining the U.S. audit market offers conflicting evidence in response to this question. In this paper, we reexamine the issue after controlling for the confounding effect of audit effort by using audit hours as a proxy for audit effort. We use a sample of public firms in the Korean audit market where both audit fees and audit hour information are publicly disclosed. While we do not find a significant association between abnormally high audit fees and audit quality, we find that abnormally low audit fees are associated with larger discretionary accruals and a higher likelihood of meeting or beating analyst earnings forecasts. These findings suggest that auditors receiving unexpectedly low audit fees do not exert enough audit effort to discipline a client’s aggressive financial reporting.

Authors

• Suzanne Mullinnix, AAMVA

• Matthew James Behrend, St. Edwards

• Sarfraz Alam Khan, University of Louisiana at Lafayette

• Young-Woo Ko, Kyonggi University

• Sung-Jin Park, Indiana University - South Bend