The Association between Excess Audit Fees and Audit Quality: A US-UK Comparison

Prior studies that examine the association between excess audit fees and audit quality (measured by discretionary accruals) using US data fail to document a significant association. However, there is no convincing explanation for this result to date. In this study, we test a cancellation hypothesis,...

Full description

Saved in:
Bibliographic Details
Main Authors: HAN, Soongsoo (Sam), Kang, Tony, Yoo, Yong Keun
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2008
Subjects:
Online Access:https://ink.library.smu.edu.sg/soa_research_smu/6
https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1005&context=soa_research_smu
Tags: Add Tag
No Tags, Be the first to tag this record!
Institution: Singapore Management University
Language: English
id sg-smu-ink.soa_research_smu-1005
record_format dspace
spelling sg-smu-ink.soa_research_smu-10052018-07-09T06:11:18Z The Association between Excess Audit Fees and Audit Quality: A US-UK Comparison HAN, Soongsoo (Sam) Kang, Tony Yoo, Yong Keun Prior studies that examine the association between excess audit fees and audit quality (measured by discretionary accruals) using US data fail to document a significant association. However, there is no convincing explanation for this result to date. In this study, we test a cancellation hypothesis, which suggests that the non-association might be due to the cancellation effect between the risk-effort effect and the bonding effect that excess fees capture. To the extent that excess fees capture the compensation for effort the auditor puts in for a risky client, which is not captured in the existing audit fee models (the risk-effort hypothesis), one would expect a negative relation between excess audit fees and discretionary accruals (measure of audit quality). However, if it reflects bonding between the client and the auditor, one would expect a positive relation between excess audit fees and discretionary accruals. In view of Ball (2001), we hypothesize that the bonding effect is likely to be stronger in US, where the capital market is most developed in the world, than in UK. However, we expect the risk-effort effect to be present in both countries. Thus, the cancellation effect from the two forces should be more pronounced in US. Consistent with this idea, we confirm the non-association between excess fees and audit quality in US but document a negative association in UK. Further analysis suggests that analyst monitoring mitigates the fee-bonding between the auditor and the client in US. Taken together, this study proposes the cancellation effect as a possible explanation for the lack of association between excess audit fees and audit quality in US. 2008-06-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soa_research_smu/6 https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1005&context=soa_research_smu http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Accountancy (SMU Access Only) eng Institutional Knowledge at Singapore Management University Business Law, Public Responsibility, and Ethics Corporate Finance Portfolio and Security Analysis
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Business Law, Public Responsibility, and Ethics
Corporate Finance
Portfolio and Security Analysis
spellingShingle Business Law, Public Responsibility, and Ethics
Corporate Finance
Portfolio and Security Analysis
HAN, Soongsoo (Sam)
Kang, Tony
Yoo, Yong Keun
The Association between Excess Audit Fees and Audit Quality: A US-UK Comparison
description Prior studies that examine the association between excess audit fees and audit quality (measured by discretionary accruals) using US data fail to document a significant association. However, there is no convincing explanation for this result to date. In this study, we test a cancellation hypothesis, which suggests that the non-association might be due to the cancellation effect between the risk-effort effect and the bonding effect that excess fees capture. To the extent that excess fees capture the compensation for effort the auditor puts in for a risky client, which is not captured in the existing audit fee models (the risk-effort hypothesis), one would expect a negative relation between excess audit fees and discretionary accruals (measure of audit quality). However, if it reflects bonding between the client and the auditor, one would expect a positive relation between excess audit fees and discretionary accruals. In view of Ball (2001), we hypothesize that the bonding effect is likely to be stronger in US, where the capital market is most developed in the world, than in UK. However, we expect the risk-effort effect to be present in both countries. Thus, the cancellation effect from the two forces should be more pronounced in US. Consistent with this idea, we confirm the non-association between excess fees and audit quality in US but document a negative association in UK. Further analysis suggests that analyst monitoring mitigates the fee-bonding between the auditor and the client in US. Taken together, this study proposes the cancellation effect as a possible explanation for the lack of association between excess audit fees and audit quality in US.
format text
author HAN, Soongsoo (Sam)
Kang, Tony
Yoo, Yong Keun
author_facet HAN, Soongsoo (Sam)
Kang, Tony
Yoo, Yong Keun
author_sort HAN, Soongsoo (Sam)
title The Association between Excess Audit Fees and Audit Quality: A US-UK Comparison
title_short The Association between Excess Audit Fees and Audit Quality: A US-UK Comparison
title_full The Association between Excess Audit Fees and Audit Quality: A US-UK Comparison
title_fullStr The Association between Excess Audit Fees and Audit Quality: A US-UK Comparison
title_full_unstemmed The Association between Excess Audit Fees and Audit Quality: A US-UK Comparison
title_sort association between excess audit fees and audit quality: a us-uk comparison
publisher Institutional Knowledge at Singapore Management University
publishDate 2008
url https://ink.library.smu.edu.sg/soa_research_smu/6
https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1005&context=soa_research_smu
_version_ 1712300671744606208