A New Measure of Accounting Quality*

50 Pages Posted: 14 Oct 2008 Last revised: 28 Jun 2010

Paul Hribar

University of Iowa - Henry B. Tippie College of Business

Todd D. Kravet

University of Connecticut - Department of Accounting

Ryan J. Wilson

University of Oregon - Lundquist College of Business

Date Written: April 27, 2010

Abstract

This study examines an alternative approach to measuring accounting quality. Adopting a neoclassical view of the audit market, we argue that unexplained audit fees are a measure of accounting quality. We develop a comprehensive model of audit fee determinants to estimate unexplained audit fees. We use the framework developed by Cronbach and Meehl (1955) to examine the construct validity of our new measure. We find that our audit fee-based measure of quality correlates positively with other empirical measures of quality. We further show our measure is predictive of fraud, restatements, and SEC comment letters, even after controlling for other measures of accounting quality. Finally, we show that it is less associated with innate firm characteristics than measures based on realized earnings, making it a good candidate for studies examining the economic consequences of accounting quality.

Keywords: Accounting Quality, Restatements, Fraud, Audit Fees

JEL Classification: M41, M43, M49, G12

Suggested Citation

Hribar, Paul and Kravet, Todd D. and Wilson, Ryan J., A New Measure of Accounting Quality* (April 27, 2010). Available at SSRN: https://ssrn.com/abstract=1283946 or http://dx.doi.org/10.2139/ssrn.1283946

Paul Hribar (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

Todd D. Kravet

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

Ryan J. Wilson

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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