Conditional Conservatism and Audit Fees

Posted: 12 Jan 2012 Last revised: 30 Aug 2014

See all articles by Hye Seung (Grace) Lee

Hye Seung (Grace) Lee

Fordham University - Accounting Area

Xu Li

Lehigh University - Department of Accounting

Heibatollah Sami

Lehigh University

Date Written: August 29, 2014


In this study, we examine the impact of conditional conservatism on audit fees and, more importantly, the influence of corporate governance on this relationship. Prior literature presents evidence regarding explanations for the existence and pervasiveness of accounting conservatism such as compensation and debt contracting, shareholder litigation, taxation, and accounting regulation. However, there is very limited evidence or discussion of the potential benefit of accounting conservatism on audit risk and thus audit fees, and how the potential benefit can be attenuated by corporate governance quality. Using a sample of firm-year observations over the period of 2004-2009, we provide evidence consistent with conditional conservatism and firms’ commitment to such conservatism reducing their audit fees. However, our evidence shows that this reduction in audit fees is moderated by higher corporate governance quality. These results have implications for auditors, regulators, standard setters, and firms’ managers. In addition, our study extends the literature on the determinants of audit fees.

Keywords: Audit Fees, Non-audit fees, Conservatism

JEL Classification: G39

Suggested Citation

Lee, Hye Seung (Grace) and Li, Xu and Sami, Heibatollah, Conditional Conservatism and Audit Fees (August 29, 2014). Forthcoming, Accounting Horizons, Available at SSRN: or

Hye Seung (Grace) Lee

Fordham University - Accounting Area ( email )

Graduate School of Business
113 W. 60th Street
New York, NY 10023
United States

Xu Li

Lehigh University - Department of Accounting ( email )

United States

Heibatollah Sami (Contact Author)

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3407 (Phone)

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