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Fair Value Measurements and Audit Fees: Evidence from the Banking Industry

40 Pages Posted: 16 Sep 2009 Last revised: 10 Sep 2014

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Yang Xu

University of Colorado Colorado Springs

Han Yi

Korea University

Date Written: December 20, 2013

Abstract

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

Ettredge, Michael and Xu, Yang and Yi, Han, Fair Value Measurements and Audit Fees: Evidence from the Banking Industry (December 20, 2013). Auditing: A Journal of Practice & Theory (2014) 33 (3): 33-58. Available at SSRN: https://ssrn.com/abstract=1473569 or http://dx.doi.org/10.2139/ssrn.1473569

Michael Ettredge (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Yang Xu

University of Colorado Colorado Springs ( email )

1420 Austin Bluffs Pkwy
Colorado Springs, CO 80920
United States

Han Yi

Korea University ( email )

Hyundai Motor Hall 502
Korea University Business School
Seoul, 136-701
Korea
+82-2-3290-2629 (Phone)

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