Do Abnormally High Audit Fees Impair Audit Quality?

Abstract

SUMMARY: This study examines whether and how audit quality proxied by the magnitude of absolute discretionary accruals is associated with abnormal audit fees, that is, the difference between actual audit fee and the expected, normal level of audit fee. The results of various regressions reveal that the association between the two is asymmetric, depending on the sign of the abnormal audit fee. For observations with negative abnormal audit fees, there is no significant association between audit quality and abnormal audit fee. In contrast, abnormal audit fees are negatively associated with audit quality for observations with positive abnormal audit fees. Our findings suggest that auditors’ incentives to deter biased financial reporting differ systematically, depending on whether their clients pay more than or less than the normal level of audit fee. Our results are robust to a variety of sensitivity checks.

Abnormal audit fees and future restatements: evidence from Tehran Stock Exchange

“…Based on the estimation results, our hypothesis is supported. This also suggests that our findings are in line with those of Choi et al (2010), Blankley et al (2012), Haribar et al (2014) and Doogar et al (2015). Consistent with the argument proposed by Dye (1991) assuming quasi-rents are inferred from the mandatory disclosure regime of audit fees and considering the prevailing voluntary disclosure regime in the TSE, we interpret audit fees in excess of normal audit production costs as auditors economic rent.…”

“…Consequently, the excessive audit fees contribute to the allowance for substandard reporting. In line with Choi et al (2010), Haribar et al (2014) also find a negative relationship between unexplained audit fees and accounting quality. However, the authors attribute this negative association to the increased audit efforts and hours worked when faced with low quality accounting.…”

“…The author's findings suggest that ABAFEE impair audit independence and result in less firm-specific information in the stock prices in the post-SOX period, while abnormal NAS do not. Considering ABAFEE as economic rents, Choi et al (2010) find an asymmetric association between the level of absolute discretionary accruals and ABAFEE and conclude that the auditors' incentives to impair audit quality and/or prevent biased financial reporting are dependent on the amount of audit fees they charge. More specifically, the authors provide some empirical evidence that ABAFEE as a proxy for economic rents may lead to lessened audit quality since the auditors receive more than the normal level of fees from their clients (cost-benefit concept).…”

Audit Fee Research on Issues Related to Ethics

“…Evidence of the impact of fees on lower audit quality is provided by Choi, Kim, and Zang (2010), showing that higher abnormal audit fees in the U.S. are associated with lower quality (measured by discretionary accruals). A study in Taiwan shows that economically important clients at the partner level are associated with lower quality (measured by accruals) for small firms but not for Big N firms (Chi, Douthett, and Lisic 2012).…”

“…However, there is a question of the interpretation of higher audit fees. Some studies, such as Choi et al (2010), interpret higher fees as abnormal profits to the auditor, but there are others that interpret higher fees as indicating greater risk and more audit work (Hribar, Kravet, and Wilson 2014). Doogar, Sivadasan, and Solomon (2015) conclude, by showing that these higher fees continue after a switch of auditor, that higher fees represent audit costs, and that they do not represent an adverse impact of auditor independence (Doogar et al 2015(Doogar et al , 1278.…”