Relevant but Delayed Information in Negotiated Audit Fees

41 Pages Posted: 31 Aug 2010 Last revised: 1 Dec 2014

See all articles by Karl Hackenbrack

Karl Hackenbrack

Vanderbilt University - Accounting

Nicole Thorne Jenkins

University of Virginia - McIntire School of Commerce

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Date Written: May 25, 2014

Abstract

Audit fee negotiations conclude with the signing of an engagement letter, typically the first quarter of the year under audit. Yet investors do not learn the audit fee paid until disclosed in the following year’s definitive proxy statement. We conjecture that negotiated audit fees impound auditor’s consequential private, client-specific knowledge about “bad news” events investors will learn eventually. We demonstrate that a proxy for the year-to-year change in the negotiated audit fee has an economically meaningful positive association with proxies for public realizations of “bad news” events that occur during the roughly 12 month period between the negotiation of the audit fee and the disclosure of the audit fee paid. Our results suggest that negotiated audit fees contain information meaningful to investors and that if disclosed proximate to the signing of the engagement letter instead of the following year, information asymmetry between managers and investors would be reduced.

Keywords: Audit fees, disclosure, private information, idiosyncratic risk

JEL Classification: M40, M41

Suggested Citation

Hackenbrack, Karl and Jenkins, Nicole Thorne and Pevzner, Mikhail, Relevant but Delayed Information in Negotiated Audit Fees (May 25, 2014). Auditing: A Journal of Practice & Theory, 33(4), 95-117, Available at SSRN: https://ssrn.com/abstract=1668983 or http://dx.doi.org/10.2139/ssrn.1668983

Karl Hackenbrack

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States

Nicole Thorne Jenkins (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

HOME PAGE: http://https://www.commerce.virginia.edu/faculty/nt4jw

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

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