Interpretive Guidance and Financial Reporting Costs: Evidence from Audit Fees

46 Pages Posted: 28 Nov 2017

See all articles by Dain C. Donelson

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business

David Folsom

University of Texas at El Paso - Department of Accounting & Information Systems

John M. McInnis

University of Texas at Austin - Department of Accounting

Richard Mergenthaler

The University of Arizona - Eller College of Management

Kyle Peterson

University of Oregon - Charles H. Lundquist School of Business

Date Written: November 22, 2017

Abstract

We examine the effect of interpretive accounting guidance on a direct and observable cost of financial reporting: audit fees. Many contend that U.S. GAAP has too much interpretive guidance, making it complex and difficult to assimilate. This effect would lead to higher audit effort and higher fees. However, specific guidance could both lower litigation risk and increase audit efficiency by reducing the need for auditors to continually deliberate complicated accounting issues across engagements. These effects would lead to lower audit fees. Overall, using both levels and changes regressions, we find that interpretive accounting guidance is associated with higher audit fees. However, this effect is smallest for firms facing the highest ex-ante litigation risk. Finally, we examine whether increased audit fees persist and find that the audit fee effect disappears by the third year after the interpretive guidance becomes effective. Overall, we find no evidence that interpretive guidance decreases audit costs.

Keywords: Interpretive Guidance, Financial Reporting Costs, Audit Fees

JEL Classification: M40, M41

Suggested Citation

Donelson, Dain C. and Folsom, David and McInnis, John M. and Mergenthaler, Richard Dean and Peterson, Kyle, Interpretive Guidance and Financial Reporting Costs: Evidence from Audit Fees (November 22, 2017). Available at SSRN: https://ssrn.com/abstract=3076195 or http://dx.doi.org/10.2139/ssrn.3076195

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
512-232-3733 (Phone)

David Folsom

University of Texas at El Paso - Department of Accounting & Information Systems ( email )

University Library - Acquisitions Department
500 West University Avenue
El Paso, TX 79968
United States

John M. McInnis

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

Richard Dean Mergenthaler (Contact Author)

The University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States
520-621-2929 (Phone)
520-621-3742 (Fax)

HOME PAGE: http://https://accounting.eller.arizona.edu/people/rick-mergenthaler

Kyle Peterson

University of Oregon - Charles H. Lundquist School of Business ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

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