Audit Risk Associated with Long-Lived Tangible Asset Intensity, Age, and Impairment

Abstract

Although long-lived tangible assets are critical for business operations and create value for investors, prior literature has not examined how the risks pertaining to these assets affect auditors’ pricing and reporting decisions. Indeed, the PCAOB (2017) has expressed concerns about persistent deficiencies in auditing fair value measurements and impairment of nonfinancial assets including tangible long-term assets. We document that the intensity of property, plant and equipment (PP&E) is negatively associated with audit fees, and that more aged PP&E and asset impairments are positively associated with audit fees. The negative association between PP&E intensity and audit fees is attenuated in presence of an auditor change, which is consistent with new auditors exerting greater audit effort to verify opening balances of these accounts. Supplemental tests indicate that the results are robust to industry partitions. These findings shed light on the ways in which long-lived tangible assets affect auditors’ risk assessments and pricing decisions.

Keywords: audit fees; property, plant and equipment (PP&E) intensity; PP&E age; asset impairments; auditor change

JEL Classification: M41, M42