Fair Value and Audit Fees

44 Pages Posted: 3 Jun 2011 Last revised: 5 Sep 2013

See all articles by Igor Goncharov

Igor Goncharov

Lancaster University - Department of Accounting and Finance

Eddie Riedl

Boston University - Questrom School of Business

Thorsten Sellhorn

Ludwig-Maximilians-Universitaet (LMU) Munich

Date Written: September 5, 2012


This paper investigates the effect of fair value reporting and its attributes on audit fees. We use as our primary sample the European real estate industry around mandatory IFRS adoption (under which reporting of property fair values becomes compulsory), due to its unique operating and reporting characteristics. We document lower audit fees for firms reporting property assets at fair value relative to those employing depreciated cost ― a difference that appears driven (in part) by impairment tests that occur only under depreciated cost. We further find that audit fees are decreasing in firm’s exposure to fair value, and increasing both in the complexity of the fair value estimation and for recognition (versus only disclosure) of fair values. We corroborate our findings in two alternative settings: contrasting UK and US real estate firms; and using UK investment trusts. Overall, the results suggest that fair values can lead to lower monitoring costs; however, any reductions in audit fees will vary with salient characteristics of the fair value reporting, including the difficulty to measure and the treatment within the financial statements.

Keywords: fair value, audit fees, audit pricing, real estate industry, IFRS

JEL Classification: M41, M42

Suggested Citation

Goncharov, Igor and Riedl, Edward J. and Sellhorn, Thorsten, Fair Value and Audit Fees (September 5, 2012). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1855628 or http://dx.doi.org/10.2139/ssrn.1855628

Igor Goncharov

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Edward J. Riedl (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-2317 (Phone)

Thorsten Sellhorn

Ludwig-Maximilians-Universitaet (LMU) Munich ( email )

Ludwigstr. 28 RG IV
Munich, Bavaria 80539
+49(0)89-21806264 (Phone)
+49(0)89-21806327 (Fax)

HOME PAGE: http://www.rwp.bwl.uni-muenchen.de/personen/professoren/sellhorn/index.html

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