Audit fees and Corporate Innovation

2019 European Accounting Association (EAA) Annual Congress

37 Pages Posted: 13 Aug 2020

See all articles by Hyung Tae Kim

Hyung Tae Kim

California State University, Fresno

Brandon Lee

Indiana University Northwest

Seungwon Lee

Pennsylvania State University Harrisburg

Sung-Jin Park

Indiana University South Bend

Multiple version iconThere are 2 versions of this paper

Date Written: May 27, 2019

Abstract

Purpose - Investigates the extent to which a client’s innovative effort affects the level of audit effort and whether the innovative-effort efficiency can attenuate the demand for greater audit effort associated with a client’s risky research-and-development (R&D) investments.

Design/methodology/approach - We treat R&D expenditure as an input measure and the patent obtained/cited in a given year as an output measure of a firm’s innovative effort. We estimate innovation efficiency as the number of patents granted to a firm in a given year, scaled by its R&D capital. As a proxy for audit effort, we use audit fees. Combining firm-year observations for fiscal years 2000 to 2010 from Compustat, patent data from the United States Patent and Trademark Office, and Audit Analytics provided a sample of 11,646 observations from 2,051 unique firms.

Findings - Results confirm that a client firm’s strategic emphasis on corporate innovations may require greater audit effort. However, we find evidence that the efficiency of a firm’s innovative effort can attenuate the demand for heightened audit effort against risky innovative efforts, implying that the external auditor’s role is not necessarily detrimental to corporate innovation, which suggests that the efficiency of a firm’s innovation effort lowers the client business risk perceived by an auditor related to corporate innovation.

Originality/value - Contributes to a stream of literature identifying facilitators and impediments to corporate innovation. Our findings also complement an emerging body of literature on the effect of a firm’s business strategies on the auditor’s decision. Prior studies have not considered the input‒output conversion of a firm’s R&D expenditure as something that the firm values. By using the number of patents obtained and cited as an output measure of a firm’s innovative effort, we extend understanding of the influence of a firm’s business strategies on the level of audit effort.

Keywords: Corporate Innovation, Auditors, Research and Development, Risk Management

Suggested Citation

Kim, Hyung Tae and Lee, Brandon and Lee, Seungwon and Park, Sung-Jin, Audit fees and Corporate Innovation (May 27, 2019). 2019 European Accounting Association (EAA) Annual Congress, Available at SSRN: https://ssrn.com/abstract=3625360 or http://dx.doi.org/10.2139/ssrn.3625360

Hyung Tae Kim

California State University, Fresno ( email )

5241 North Maple Avenue
Fresno, CA 93740
United States

Brandon Lee

Indiana University Northwest ( email )

3400 Broadway
Gary, IN 46408
United States

Seungwon Lee (Contact Author)

Pennsylvania State University Harrisburg ( email )

777 W. Harrisburg Pike
Middletown, PA 17057
United States

Sung-Jin Park

Indiana University South Bend ( email )

South Bend, IN 46634
United States

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