Auditor Fees and Cost of Debt

Posted: 14 Nov 2007

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Cristi A. Gleason

University of Iowa - Department of Accounting

Shane Heitzman

University of Southern California - Marshall School of Business

Kevin Melendrez

New Mexico State University - Department of Accounting & Business Computer Systems

Abstract

Using a sample of 560 new debt issues, we investigate the relation between audit, nonaudit, and total auditor fees and firms' cost of debt. The Securities and Exchange Commission (SEC) argues that fees from nonaudit services weaken auditor independence, reduce financial statement reliability, and increase firms' cost of capital. To test this assertion, we examine the association between auditor fees and the cost of debt, as well as the effects of auditor fees on the relation between financial statement information and the cost of debt. We find evidence that nonaudit fees are directly related to the cost of debt for investment-grade issuers. Our results are robust to controlling for auditor tenure and firm governance. We also find evidence that the association between earnings and the cost of debt decreases as audit fees increase. We find no evidence that auditor fees directly affect the cost of debt for the non-investment-grade firms, but we do find that the association between earnings and the cost of debt decreases as nonaudit fees increase.

Keywords: Auditor Independence, Cost of Capital, Bonds

JEL Classification: G10, G32, M41, M49

Suggested Citation

Dhaliwal, Dan S. and Gleason, Cristi A. and Heitzman, Shane and Melendrez, Kevin, Auditor Fees and Cost of Debt. Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1030023

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Cristi A. Gleason (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

Shane Heitzman

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Kevin Melendrez

New Mexico State University - Department of Accounting & Business Computer Systems ( email )

United States

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