Relevant but Delayed Information in Negotiated Audit Fees
41 Pages Posted: 31 Aug 2010 Last revised: 1 Dec 2014
Date Written: May 25, 2014
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: Suggested Citation