Fair Value Measurements and Audit Fees: Evidence from the Banking Industry
40 Pages Posted: 16 Sep 2009 Last revised: 10 Sep 2014
Date Written: December 20, 2013
Using publicly traded bank holding company data from 2008 through 2011, this paper documents that the proportions of fair-valued assets held by banks are positively associated with audit fees. The positive association between audit fees and the proportions of total assets that are fair-valued using Level 3 inputs is greater than its positive association with the proportions of total assets that are fair-valued using Level 1 or Level 2 inputs. These results are consistent with a hypothesized scenario in which audit effort increases in the difficulty of verifying asset fair values. We also document that bank specialist auditors, defined as in Behn et al. (2008), charge lower audit fees to bank clients on average, suggesting cost efficiencies passed to clients as lower fees. However, bank expert auditors charge more for auditing the proportions of total assets that are fair-valued. Overall, the results support concerns expressed by some observers that greater use of fair value measurements for financial instruments will trigger increased audit fees.
Keywords: audit fees, fair value measurements, FAS 157, ASC 820, banks
JEL Classification: M41
Suggested Citation: Suggested Citation