Financial Versus Operating Liability Leverage and Audit Fees

14 Pages Posted: 22 May 2020

See all articles by Abhijit Barua

Abhijit Barua

Florida International University - School of Accounting

Md. Safayat Hossain

affiliation not provided to SSRN

Dasaratha V. Rama

Florida International University (FIU)

Date Written: July 2019

Abstract

We argue that different types of leverage have different implications for audit risk and audit fees, and hence need to be separately examined. Using data from the years 2004 to 2016, we find that operating liability leverage is positively associated with audit fees and that financing leverage is negatively related to audit fees. The results suggest that the benefits from monitoring effects of financial leverage outweigh the costs associated with the risk of financial distress and financial misreporting. We also find that estimated operating liability leverage has a bigger effect on audit fees than contractual operating liability leverage, consistent with suggestions that auditors are more conservative in the presence of higher estimation risk. Thus, our findings highlight the importance of recognizing sources of leverage in audit risk in general and audit fee models in particular.

Keywords: audit fees, audit risk, financing leverage, operating liability leverage

Suggested Citation

Barua, Abhijit and Hossain, Md. Safayat and Rama, Dasaratha, Financial Versus Operating Liability Leverage and Audit Fees (July 2019). International Journal of Auditing, Vol. 23, Issue 2, pp. 231-244, 2019, Available at SSRN: https://ssrn.com/abstract=3602141 or http://dx.doi.org/10.1111/ijau.12157

Abhijit Barua (Contact Author)

Florida International University - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-3483404 (Phone)

Md. Safayat Hossain

affiliation not provided to SSRN

No Address Available

Dasaratha Rama

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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