The Relation between Audit Fee Cuts during the Global Financial Crisis and Earnings Quality and Audit Quality

55 Pages Posted: 21 Sep 2016

See all articles by Long Chen

Long Chen

George Mason University - Department of Accounting

Gopal V. Krishnan

Bentley University

Wei Yu

Hunter College - City University of New York

Date Written: September 15, 2016

Abstract

The Global Financial Crisis (GFC) presents a unique opportunity to study how auditors respond to an exogenous shock to the clients’ operating environment. Also, due to the GFC, auditors were under pressure from clients to cut audit fees during the crisis. Regulators were concerned that lower audit fees could result in lower audit effort, and more importantly, impair audit quality. We conduct a comprehensive analysis of multiple attributes of client firms’ earnings quality and audit quality. Collectively, our findings indicate that there is no significant difference in earnings quality between client firms that received a fee cut during the GFC and control firms consisting of firms that did not receive a fee cut and firms that received a fee cut before the GFC. Further, there is no significant difference in the likelihood of a going concern opinion or a financial restatement, our proxies for audit quality, between client firms that received a fee cut during the GFC and control firms. Our findings contribute to understanding the role of auditors during the GFC.

Keywords: Financial Crisis, Audit Fees, Earnings Quality, Going Concern

Suggested Citation

Chen, Long and Krishnan, Gopal and Yu, Wei, The Relation between Audit Fee Cuts during the Global Financial Crisis and Earnings Quality and Audit Quality (September 15, 2016). Available at SSRN: https://ssrn.com/abstract=2839901 or http://dx.doi.org/10.2139/ssrn.2839901

Long Chen

George Mason University - Department of Accounting ( email )

Fairfax, VA
United States

Gopal Krishnan (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

Wei Yu

Hunter College - City University of New York ( email )

695 Park Avenue
New York, NY 10065
United States

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