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Fair value and audit fees

Author

Listed:
  • Igor Goncharov

    (WHU – Otto Beisheim School of Management)

  • Edward J. Riedl

    (Boston University)

  • Thorsten Sellhorn

    (WHU – Otto Beisheim School of Management)

Abstract

This paper investigates the effect of fair value reporting and its attributes on audit fees. We use as our primary sample the European real estate industry around mandatory IFRS adoption (under which reporting of property fair values becomes compulsory), due to its unique operating and reporting characteristics. We document lower audit fees for firms reporting property assets at fair value relative to those employing depreciated cost—a difference that appears driven, in part, by impairment tests that occur only under depreciated cost. We further find that audit fees are decreasing in firms’ exposure to fair value and increasing both in the complexity of the fair value estimation and for recognition (versus only disclosure) of fair values. We corroborate our findings in two alternative settings: contrasting UK and US real estate firms and using UK investment trusts. Overall, the results suggest that fair values can lead to lower monitoring costs; however, any reductions in audit fees will vary with salient characteristics of the fair value reporting, including the difficulty to measure and the treatment within the financial statements.

Suggested Citation

  • Igor Goncharov & Edward J. Riedl & Thorsten Sellhorn, 2014. "Fair value and audit fees," Review of Accounting Studies, Springer, vol. 19(1), pages 210-241, March.
    • Handle: RePEc:spr:reaccs:v:19:y:2014:i:1:d:10.1007_s11142-013-9248-5
    DOI: 10.1007/s11142-013-9248-5
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    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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