The Joint Determination of Audit Fees, Non-Audit Fees, And Abnormal Accruals

55 Pages Posted: 7 Aug 2002

See all articles by Rick Antle

Rick Antle

Yale School of Management

Elizabeth A. Gordon

Temple University - Department of Accounting

Ganapathi S. Narayanamoorthy

Tulane University - Accounting & Taxation

Ling Zhou

University of New Mexico

Date Written: March 31, 2004

Abstract

Prior research has estimated piece-meal the determinants of audit fees, non-audit fees and abnormal accruals. Intuition, informal analysis, and a variety of theories suggest that audit fees, non-audit fees, and abnormal accruals are jointly determined. We address this endogeneity issue by modeling the confluence of audit fees, fees for non-audit services and abnormal accruals in a system of simultaneous equations.

Our joint estimation provides a starting point to look simultaneously at several competing theories. Using audit and non-audit fee data from the UK for 1994-2000, we find evidence consistent with knowledge spillovers (or economies of scope) from auditing to non-audit services and from non-audit services to auditing. While knowledge spillovers from non-audit services to auditing have been found in prior research [e.g. see Simunic 1984], the presence of knowledge spillovers from auditing to non-audit services is a new result. Contrary to recent results in Ferguson et al. (2001) and Frankel et al. (2002), we do not find support for the assertion that fees for non-audit services increase abnormal accruals. In fact, contrary to the results in Ashbaugh et al. (2003) and Chung and Kallapur (2003), we find that non-audit fees decrease abnormal accruals, which we attribute to the productive effects of non-audit services. We also find evidence that audit fees increase abnormal accruals, consistent with behavioral theories of unconscious influence or bias in the auditor-client relation. The findings are robust to tests with US data.

Keywords: Auditing, Auditor Independence, Earnings Management, Abnormal Accruals, Economies of Scope, Endogeneity

JEL Classification: C30, M40, M41, M43, M49

Suggested Citation

Antle, Rick and Gordon, Elizabeth A. and Narayanamoorthy, Ganapathi S. and Zhou, Ling, The Joint Determination of Audit Fees, Non-Audit Fees, And Abnormal Accruals (March 31, 2004). Yale ICF Working Paper No. 02-21; Yale SOM Working Paper No. AC-15. Available at SSRN: https://ssrn.com/abstract=318943 or http://dx.doi.org/10.2139/ssrn.318943

Rick Antle (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6048 (Phone)

Elizabeth A. Gordon

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
2152046422 (Phone)

Ganapathi S. Narayanamoorthy

Tulane University - Accounting & Taxation ( email )

United States

Ling Zhou

University of New Mexico ( email )

107 Humanitites Building
Albuquerque, NM 87131-1221
United States
(505)277-0335 (Phone)

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