The Joint Determination of Audit Fees, Non-Audit Fees, and Abnormal Accruals
AbstractPrior research has estimated piece-meal the determinants of audit fees, non-audit fees and abnormal accruals. Intuition, informal analysis, and a variety of theories suggest that audit fees, non-audit fees, and abnormal accruals are jointly determined. We address this endogeneity issue by modeling the confluence of audit fees, fees for non-audit services and abnormal accruals in a system of simultaneous equations. Our joint estimation provides a starting point to look simultaneously at several competing theories. Using audit and non-audit fee data from the UK for 1994-2000, we find evidence consistent with knowledge spillovers (or economies of scope) from auditing to non-audit services and from non-audit services to auditing. While knowledge spillovers from non-audit services to auditing have been found in prior research [e.g. see Simunic 1984], the presence of knowledge spillovers from auditing to non-audit services is a new result. Contrary to recent results in Ferguson et al. (2001) and Frankel et al. (2002), we do not find support for the assertion that fees for non-audit services increase abnormal accruals. In fact, contrary to the results in Ashbaugh et al. (2003) and Chung and Kallapur (2003), we find that non-audit fees decrease abnormal accruals, which we attribute to the productive effects of non-audit services. We also find evidence that audit fees increase abnormal accruals, consistent with behavioral theories of unconscious influence or bias in the auditor-client relation. The findings are robust to tests with US data.
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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2502.
Date of creation: 07 Aug 2002
Date of revision: 02 May 2006
Auditing; Auditor Independence; Earnings Management; Abnormal Accruals; Economies of Scope; Endogeneity;
Find related papers by JEL classification:
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
- M40 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - General
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- M49 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Other
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