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Unformatted text preview: Auditor fees and audit quality Rani Hoitash Department of Accountancy, Bentley College, Waltham, Massachusetts, USA, and Ariel Markelevich and Charles A. Barragato Long Island University, Brookville, New York, USA Abstract Purpose The paper aims to examine the relation between fees paid to auditors and audit quality during the period of 2000-2003. Design/methodology/approach The 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. Findings The 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/implications The 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 implications Policy 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/value In 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. Keywords Auditors fees, Auditors, Quality Paper type Research paper Introduction The relation between auditor independence and an auditors ability to conduct high-quality audits has been widely debated by regulators, legislators, financial statement users and researchers. Much of this discussion has been fueled by dramatic changes in the market for accounting services during the 1990s, as well as concerns The current issue and full text archive of this journal is available at www.emeraldinsight.com/0268-6902.htm The authors thank Jean Bedard, Douglas Carmichael, Masako Darrough, Ross Fuerman, Rebecca Rosner and Joseph Weintrop for their comments. This paper also benefited from theRebecca Rosner and Joseph Weintrop for their comments....
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This note was uploaded on 10/01/2011 for the course ACC 221 taught by Professor Smith during the Spring '10 term at Alfred University.
- Spring '10