PurposeThe paper aims to examine the relation between fees paid to auditors and audit quality during the period of 2000‐2003.Design/methodology/approachThe paper constructs a measure of auditor profitability that is used as a proxy for auditor independence. The methodology is grounded in the notion that auditor independence is influenced by effort and risk‐adjusted fees, rather than the level of fees received from clients. Since, risk and effort are unobservable, the paper uses proxies based on client size, complexity and risk to estimate abnormal fees. Abnormal fees are derived using a fee estimation model drawn from prior literature. The paper employs two metrics to assess audit quality – the standard deviation of residuals from regressions relating current accruals to cash flows and the absolute value of performance‐adjusted discretionary accruals.FindingsThe paper documents a statistically significant negative association between total fees and both audit quality proxies over all years. These findings are robust to a variety of additional tests and several alternative design specifications. The results (pre‐ and post‐SOX) are consistent with economic bonding being a determinant of auditor behavior rather than auditor reputational concerns.Research limitations/implicationsThe possibility that the empirical tests do not completely capture the impact of unobserved risk cannot be ruled out, though the paper attempts to do so by employing alternative specifications and sensitivity tests.Practical implicationsPolicy makers should note that current restrictions on the provision of non‐audit services may not sufficiently resolve the issue of economic bonding and its impact on auditor independence.Originality/valueIn contrast to previous studies whose results are ambiguous, the paper finds a statistically significant positive association between several measures of total fees (it uses size‐adjusted and abnormal fees) and two metrics of accruals quality in all years (2000‐2003), consistent with economic bonding being a determinant of auditor behavior rather then auditor reputation concerns.
PurposeThe paper aims to examine earnings quality during the post‐acquisition period.Design/methodology/approachThe paper defines earnings quality as an earnings stream more closely associated with future cash flows from operations. It uses the stock market's reaction at the acquisition announcement to infer merger motives and hypothesize that synergy‐motivated acquisitions will produce higher quality earnings than agency‐motivated acquisitions.FindingsThe paper finds that synergy‐motivated acquisitions produce higher quality earnings than agency‐motivated acquisitions.Research limitations/implications (if applicable)The findings are consistent with this prediction and support the view that managers who pursue synergy or agency‐motivated acquisitions do not face the same economic environment and incentive schemes. The results are also consistent with the notion that incentives for earnings management are greater following agency‐motivated acquisitions when compared to those of synergy‐motivated acquisitions. The authors conjecture that these differences originate from those accounting‐based contracts that are likely impacted by reported post‐acquisition balance sheet and income statement amounts.Practical implicationsThe findings of the paper show that the motive for the acquisition has lasting effect, several years post acquisition on the quality of earnings produced by the merged entity; thus furnishing additional importance to identifying the motive for the acquisition.Originality/valueThe paper uses the corporate acquisition setting to examine earnings quality during the post‐acquisition period. This paper should be relevant for researchers studying either the quality of earnings or corporate acquisitions.
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