Are Audit Fees Linear in Accruals?

49 Pages Posted: 1 Nov 2018 Last revised: 13 Jul 2021

See all articles by Ryan Casey

Ryan Casey

University of Denver

Feng Gao

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Michael Kirschenheiter

College of Business Administration University of Illinois at Chicago

Siyi Li

California State University, Fullerton - Department of Accounting

Shail Pandit

University of Illinois at Chicago

Date Written: July 13, 2021

Abstract

This study examines the role of accruals in the pricing of financial statement audits. We posit that both large positive and large negative accruals represent increases in the auditor’s inherent risk, resulting in a nonlinear relation between accruals and audit fees. Consistent with our expectations, we find that both large negative and large positive total accruals are associated with higher audit fees. Further, the nonlinear relation between total accruals and audit fees is asymmetric, with a steeper slope on positive total accruals than negative total accruals. We next partition total accruals into specific asset accruals using an approach developed by Casey, Gao, Kirschenheiter, Li, and Pandit (2016, 2017) and find that accruals originating from different transactions exhibit predictably nonlinear relations with audit fees. On the whole, our results suggest that auditors respond asymmetrically to accruals based on the magnitude and source of the accrual.

Suggested Citation

Casey, Ryan J. and Gao, Feng and Kirschenheiter, Michael and Li, Siyi and Pandit, Shailendra, Are Audit Fees Linear in Accruals? (July 13, 2021). Available at SSRN: https://ssrn.com/abstract=3263854 or http://dx.doi.org/10.2139/ssrn.3263854

Ryan J. Casey

University of Denver ( email )

2101 South University
Boulevard, Suite 355
Denver, CO 80208-8921
United States
(303) 871-7695 (Phone)

Feng Gao

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

Michael Kirschenheiter

College of Business Administration University of Illinois at Chicago ( email )

601 South Morgan Street
11th Floor
Chicago, IL 60607
United States
312.996-2284 (Phone)
312.996-4520 (Fax)

Siyi Li

California State University, Fullerton - Department of Accounting ( email )

P.O. Box 34080
Fullerton, CA 92834-6848
United States

Shailendra Pandit (Contact Author)

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
(312) 355-1331 (Phone)
(312) 996-4520 (Fax)

HOME PAGE: http://business.uic.edu/faculty/shailendra-shail-pandit

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