A New Approach to Estimating the Relation between Audit Fees and Financial Misconduct

57 Pages Posted: 3 Nov 2015 Last revised: 30 Aug 2018

See all articles by Bidisha Chakrabarty

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business

Scott Duellman

Saint Louis University - Department of Accounting

Michael Hyman

Syracuse University - Joseph I. Lubin School of Accounting

Date Written: August 27, 2018

Abstract

Research on the association between abnormal audit fees (measuring audit effort) and financial misconduct has produced mixed results. The use of actual misstatements in this research creates small-sample inferences, introduces systematic selection bias, and reduces the scope of sample coverage. In this study we use a metric based on Benford’s Law to analyze the impact of abnormal audit fees on the likelihood of misconduct. This measure is parsimonious, avoids selection bias, and can be computed for a large sample of public firms. Consistent with theory, we find that greater audit effort reduces the likelihood of misconduct and auditor resignations are more likely for clients with higher misconduct likelihood. Our findings are not driven by audit firm size, client size, the governance structure of the client, or economic bonding explanations. The effect is not subsumed when controlling for alternative misconduct measurement metrics and is robust across multiple tests to address endogeneity.

Keywords: Audit Fees, Misconduct; Resignations; Benford Score

JEL Classification: G32; M41

Suggested Citation

Chakrabarty, Bidisha and Duellman, Scott and Hyman, Michael, A New Approach to Estimating the Relation between Audit Fees and Financial Misconduct (August 27, 2018). Available at SSRN: https://ssrn.com/abstract=2685175 or http://dx.doi.org/10.2139/ssrn.2685175

Bidisha Chakrabarty (Contact Author)

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO MO 63108-3397
United States
3149773607 (Phone)
3149771479 (Fax)

HOME PAGE: http://business.slu.edu/departments/finance/faculty-staff/bidisha-chakrabarty

Scott Duellman

Saint Louis University - Department of Accounting ( email )

3674 Lindell Blvd.
St. Louis, MO 63108
United States

Michael Hyman

Syracuse University - Joseph I. Lubin School of Accounting ( email )

Syracuse, NY
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
335
Abstract Views
1,610
rank
88,109
PlumX Metrics