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Are Extensive Audits 'Good News'? Market Perceptions of Abnormal Audit Fees and Fair Value Disclosures

Author

Listed:
  • Ulf Mohrmann

    () (Department of Economics, University of Konstanz, Germany)

  • Jan Riepe

    () (Munich School of Management, University of Munich, Germany)

  • Ulrike Stefani

    () (Department of Economics, University of Konstanz, Germany)

Abstract

Although the role of auditing is to increase the reliability of financial statements, surprisingly little is known about addressees’ perceptions of the auditor-client relationship. Using a sample of more than 1,000 U.S. bank-years from 2008 to 2011, we analyze the economic consequences of the joint announcement of audit fees and the level breakdown of fair value assets. We confirm prior findings that audit fees are higher for banks with larger proportions of Level 3 fair values. Moreover, we find that the market perception regarding fair value assets depends on the extent of managerial discretion in the estimation process. Most importantly, we find evidence consistent with the notion that addressees’ interpret abnormal audit fees as an indication of additional risk. Thus, unexpected audit fees are not interpreted as a signal for a more reliable audit, but further increase the market discount on Level 3 fair values. Bank managers have to consider these negative consequences in their reporting strategy.

Suggested Citation

  • Ulf Mohrmann & Jan Riepe & Ulrike Stefani, 2013. "Are Extensive Audits 'Good News'? Market Perceptions of Abnormal Audit Fees and Fair Value Disclosures," Working Paper Series of the Department of Economics, University of Konstanz 2013-08, Department of Economics, University of Konstanz.
  • Handle: RePEc:knz:dpteco:1308
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    File URL: http://www.uni-konstanz.de/FuF/wiwi/workingpaperseries/WP_08-Mohrmann-Riepe-Stefani_2013.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Audit Fees; Fair Value Accounting; Fair Value Hierarchy; Banks; Valuation;

    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
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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