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The Impact of R&D Intensity on Demand for Specialist Auditor Services

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  • JAYNE M. GODFREY
  • JANE HAMILTON

Abstract

The audit fee research literature argues that auditors' costs of developing brand name reputations, including top†tier designation and recognition for industry specialization, are compensated through audit fee premiums. Audited firms reduce agency costs by engaging high†quality auditors who monitor the levels and reporting of discretionary expenditures and accruals. In this study we examine whether specialist auditor choice is associated with a particular discretionary expenditure †research and development (R&D). For a large sample of U.S. companies from a range of industries, we find strong evidence that R&D intensity is positively associated with firms' choices of auditors who specialize in auditing R&D contracts. Additionally, we find that R&D intensive firms tend to appoint top†tier auditors. We use simultaneous equations to control for interrelationships between dependent variables in addition to single†equation ordinary least squares (OLS) and logistic regression models. Our results are particularly strong in tests using samples of small firms whose auditor choice is not constrained by the need to appoint a top†tier auditor to ensure the auditor's financial independence from the client.

Suggested Citation

  • Jayne M. Godfrey & Jane Hamilton, 2005. "The Impact of R&D Intensity on Demand for Specialist Auditor Services," Contemporary Accounting Research, John Wiley & Sons, vol. 22(1), pages 55-93, March.
    • Handle: RePEc:wly:coacre:v:22:y:2005:i:1:p:55-93
    DOI: 10.1506/P9FJ-EKAL-FPJQ-CM9N
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    Cited by:

    1. Sihai Li & Yi Quan & Gary Gang Tian & Kun Tracy Wang & Stella Huiying Wu, 2022. "Academy fellow independent directors and innovation," Asia Pacific Journal of Management, Springer, vol. 39(1), pages 103-148, March.
    2. Rani Hoitash & Udi Hoitash & Ari Yezegel, 2021. "Can sell-side analysts’ experience, expertise and qualifications help mitigate the adverse effects of accounting reporting complexity?," Review of Quantitative Finance and Accounting, Springer, vol. 57(3), pages 859-897, October.
    3. Nguyen, Lily & Vu, Le & Yin, Xiangkang, 2020. "The undesirable effect of audit quality: Evidence from firm innovation," The British Accounting Review, Elsevier, vol. 52(6).
    4. Fang Sun & Fengyun Wu, 2023. "The Impact Of Debt Structure On Auditorchoice," Accounting & Taxation, The Institute for Business and Finance Research, vol. 15(2), pages 105-115.
    5. Chen, Shenglan & Lin, Bingxuan & Lu, Rui & Ma, Hui, 2016. "Pay for accounting performance and R&D investment: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 142-153.
    6. Lee, Eugenia Y. & Ha, Wonsuk & Park, Sunyoung, 2023. "Auditor specialization in R&D and clients’ R&D investment-q sensitivity," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(2).
    7. Huasheng Gao & Huai Zhang & Jin Zhang, 2018. "Employee turnover likelihood and earnings management: evidence from the inevitable disclosure doctrine," Review of Accounting Studies, Springer, vol. 23(4), pages 1424-1470, December.
    8. Reheul, Anne-Mie & Van Caneghem, Tom & Verbruggen, Sandra, 2011. "Auditor choice in the Belgian nonprofit sector: a behavioral perspective," Working Papers 2011/36, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    9. Jong†Hag Choi & T. J. Wong, 2007. "Auditors' Governance Functions and Legal Environments: An International Investigation," Contemporary Accounting Research, John Wiley & Sons, vol. 24(1), pages 13-46, March.
    10. Zenghui Liu & Bo Ouyang & Xiaojie (Christine) Sun, 2015. "CEO Power and Auditor Choice," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 4(4), pages 44-51, October.
    11. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    12. Li-Jen He & Jianxiong Chen, 2021. "Does Mandatory Audit Partner Rotation Influence Auditor Selection Strategies?," Sustainability, MDPI, vol. 13(4), pages 1-21, February.
    13. Mahdi Salehi & Grzegorz Zimon & Hayder Adnan Hashim & Ryszard Jędrzejczak & Adam Sadowski, 2022. "Accounting Quality and Audit Attributes on the Stock Price Crashes in an Emerging Market," Risks, MDPI, vol. 10(10), pages 1-24, October.
    14. Huai Zhang & Jin Zhang, 2023. "Political corruption and accounting choices," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 443-481, March.

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