The Differential Effects of Auditors' Non-Audit and Audit Fees on Accrual Quality
53 Pages Posted: 3 Aug 2006
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
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