Fees Paid to Audit Firms, Accrual Choices and Corporate Governance

Posted: 12 May 2004

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Abstract

We examine the relation between the fees paid to auditors for audit and non-audit services and the choice of accrual measures for a large sample of firms. Using our pooled sample, we find that the ratio of non-audit fees to total fees has a positive relation with the absolute value of accruals similar to Frankel et al. (2002). However, using latent class mixture models to identify clusters of firms with a homogenous regression structure reveals that this positive association only occurs for about 8.5 percent of the sample. In contrast to the fee ratio results, we find consistent evidence of a negative relation between the level of fees (both audit and non-audit) paid to auditors and accruals (i.e., higher fees are associated with smaller accruals). The latent class analysis also indicates that this negative relation is strongest for client firms with weak governance. Overall, our results are most consistent with auditor behavior being constrained by the reputation effects associated with allowing clients to engage in unusual accrual choices.

Keywords: Audit fees, auditor independence, accruals, corporate governance

JEL Classification: M41, M43, M49, G34, L14

Suggested Citation

Larcker, David F. and Richardson, Scott Anthony, Fees Paid to Audit Firms, Accrual Choices and Corporate Governance. Journal of Accounting Research, Vol. 42, No. 3, June 2004. Available at SSRN: https://ssrn.com/abstract=545303

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Scott Anthony Richardson (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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