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Pricing the Audit Risk of Innovation: Intangibles and Patents

Author

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  • Daqun Zhang

    (Department of Accounting, Finance, & Business Law, College of Business, Texas A&M University-Corpus Christi, 6300 Ocean Drive, Unit 5808, Corpus Christi, TX 78412, USA)

  • Donald R. Deis

    (Department of Accounting, Finance, & Business Law, College of Business, Texas A&M University-Corpus Christi, 6300 Ocean Drive, Unit 5808, Corpus Christi, TX 78412, USA)

  • Hsiao-Tang Hsu

    (Department of Accounting, Finance, & Business Law, College of Business, Texas A&M University-Corpus Christi, 6300 Ocean Drive, Unit 5808, Corpus Christi, TX 78412, USA)

Abstract

The economic literature documents that the investment rate in intangible assets, including intellectual property (IP), has far outpaced that of tangible assets for several decades. In this context, our research delves into the impact of self-created intangible assets on the auditor’s risk assessment. We present compelling evidence that, on average, research and development (R&D) knowledge capital is associated with higher audit fees. Using patent-based metrics as the proxies for innovation outcomes, we reveal that the number of patents (quantity), patent citations (quality-adjusted quantity), and patent technology classes (scope) all positively correlate with audit fees. Additional analyses show that innovation efficiency is negatively associated with audit fees. Furthermore, firms with a higher intensity of knowledge capital are more likely to receive going concern opinions than those with significant innovation outcomes. These findings provide valuable insights into the complex relationship between intangible assets and audit risk assessment.

Suggested Citation

  • Daqun Zhang & Donald R. Deis & Hsiao-Tang Hsu, 2025. "Pricing the Audit Risk of Innovation: Intangibles and Patents," IJFS, MDPI, vol. 13(1), pages 1-19, March.
    • Handle: RePEc:gam:jijfss:v:13:y:2025:i:1:p:42-:d:1605437
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    References listed on IDEAS

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