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

See all articles by Patrick Krauss

Patrick Krauss

Handelshochschule Leipzig (HHL)

Paul Pronobis

ESCP Europe - Department Financial Reporting and Audit (FRA)

Henning Zülch

HHL Leipzig Graduate School of Management

Date Written: June 15, 2014

Abstract

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

Krauss, Patrick and Pronobis, Paul and Zülch, Henning, Abnormal Audit Fees and Audit Quality: Initial Evidence from the German Audit Market (June 15, 2014). Journal of Business Economics (JBE): Volume 85, Issue 1 (2015), Page 45-84. Available at SSRN: https://ssrn.com/abstract=1626186 or http://dx.doi.org/10.2139/ssrn.1626186

Patrick Krauss (Contact Author)

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, D-04109
Germany
0049-341-9851-701 (Phone)
0049-341-9851-702 (Fax)

HOME PAGE: http://www.hhl.de/faculty-research/faculty/accounting-and-auditing/

Paul Pronobis

ESCP Europe - Department Financial Reporting and Audit (FRA) ( email )

79, avenue de la République
Paris, 75011
France

Henning Zülch

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, Saxony D-04109
Germany
+49(341)9851701 (Phone)
+49(341)9851702 (Fax)

HOME PAGE: http://www.hhl.de/faculty-research/faculty/accounting-auditing/

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