Abnormal Audit Fees and Audit Quality: Initial Evidence from the German Audit Market
Journal of Business Economics (JBE): Volume 85, Issue 1 (2015), Page 45-84
37 Pages Posted: 17 Jun 2010 Last revised: 27 Jan 2015
Date Written: June 15, 2014
This study investigates the economic auditor-client dependency issue by examining the association between abnormal audit fee pricing and audit quality. Our study is the first to analyze this phenomenon empirically for the institutional setting of German IFRS firms by using a sample of 2,334 firm-year observations for the period from 2005 to 2010. Our empirical results demonstrate that positive abnormal audit fees are negatively associated with audit quality and imply that the audit fee premium is a significant indicator of compromised auditor independence due to economic auditor-client bonding. Audit fee discounts generally do not lead to a reduced audit effort, or respectively, audit quality is not impaired when client bar-gaining power is strong. The association of positive abnormal audit fees and audit quality is robust to different audit quality surrogates such as absolute discretionary accruals, financial restatements, and meeting or beating analysts’ earnings forecasts.
Keywords: Abnormal Audit Fees, Auditor Independence, Auditor-Client Economic Bonding, Audit Quality, Earnings Management
JEL Classification: C30, M41, M42
Suggested Citation: Suggested Citation