Does Audit Client’s Positive Media Attention Affect Audit Fees?

Abstract

This paper empirically investigates whether positive media attention affects audit fees. Specifically, we use the Wall Street Journal Management Top 250 (WSJ 250) ranking of best-managed companies to investigate the impact of positive media attention on audit fees. Employing a difference-in-difference approach on U.S. American listed companies, we find that audit fees increase over time and that companies being part of the WSJ 250 ranking pay generally higher fees than their peers. However, our results suggest that the first publication of the ranking and, thus, positive media attention leads to a reduction in the increase in audit fees. This result suggests that auditors have a special interest for audit clients receiving positive media attention and adjust their pricing strategy accordingly. Similarly, our additional analyses show that positive media attention results in an increase in earnings management and, at the same time, reduces the likelihood for an accounting restatement. This result suggests that auditors allow clients, who receive positive media attention, a higher level of earnings management to retain them and, at the same time, detect accounting errors more frequently to prevent reputational damage.

Keywords: audit fees, media attention, positive media, audit client characteristics, auditor independence, difference-in-difference analysis

JEL Classification: M4, M42, M48, L14