The Differential Effects of Auditors' Non-Audit and Audit Fees on Accrual Quality

53 Pages Posted: 3 Aug 2006

See all articles by Bin Srinidhi

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Ferdinand A. Gul

Monash University Sunway Campus

Abstract

This paper examines linkages between the audit and non-audit fees and accrual quality. We measure accrual quality by the Francis et al. (2005) modification of Dechow and Dichev (2002) measure. We posit that in settings where audit quality is compromised by a loss of auditor independence, managers use accruals more opportunistically and thereby drive down the accrual quality. Conversely, higher audit effort and quality translate to a better accrual quality. Our dependent variables are the relative magnitude of non-audit fees to audit fees, the absolute magnitudes of audit, non-audit and total fees. Results show that accrual quality has a significant negative association with the magnitude of non-audit fees but a significant positive association with audit fees. This latter result is consistent with the proposition that higher audit fee reflects higher audit effort and better judgments about the propriety of accruals, but is not consistent with the proposition that audit fee is associated with economic bonding.

Keywords: Economic bonding, accrual quality, accruals, audit fees, non-audit fees

JEL Classification: M49, M41, M43, G30

Suggested Citation

Srinidhi, Bin and Gul, Ferdinand A., The Differential Effects of Auditors' Non-Audit and Audit Fees on Accrual Quality. Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=920776

Bin Srinidhi (Contact Author)

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Ferdinand A. Gul

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

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