Disclosure of Fees Paid to Auditors and the Market Valuation of Earnings Surprises

Posted: 17 Jan 2006

See all articles by Jere R. Francis

Jere R. Francis

Maastricht University

Bin Ke

National University of Singapore

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Abstract

We investigate if the SEC's mandated disclosure of fees for audit and nonaudit services affected the market's perception of auditor independence and earnings quality. Following the initial fee disclosures, we find that the market valuation of quarterly earnings surprises (earnings response coefficient) is significantly lower for firms with high levels of nonaudit fees than for firms with low levels of nonaudit fees. In contrast, in the year prior to the new fee disclosures, there was no reduction in earnings response coefficients for firms that subsequently reported high nonaudit fees. Our evidence suggests that mandated fee disclosures provided new information and was viewed by the market as lowering the perception of auditor independence and earnings quality.

Keywords: nonaudit fees, auditor independence, earnings quality, earnings response coefficients

JEL Classification: G12, G14, G38, M41, M49

Suggested Citation

Francis, Jere R. and Ke, Bin, Disclosure of Fees Paid to Auditors and the Market Valuation of Earnings Surprises. Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=875785

Jere R. Francis (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Bin Ke

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-30
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

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