The Impact of R&D Intensity on Demand for Specialist Auditor Services

44 Pages Posted: 3 Feb 2005

Multiple version iconThere are 2 versions of this paper

Date Written: November 2003

Abstract

The audit fee research literature argues that auditors' costs of developing brand name reputations, including top tier designation and recognition for industry specialization, are compensated through audit fee premiums. Audited firms seek to reduce agency costs by engaging high quality auditors who will monitor the levels and reporting of discretionary expenditures and accruals. In this study we examine whether specialist auditor choice is associated with a particular discretionary expenditure, research and development (R&D). For a large sample of US companies from a range of industries, we find strong evidence that R&D intensity is positively associated with firms' choices of auditors who specialize in auditing R&D contracts. Additionally, we find that R&D intensive firms tend to appoint top tier auditors. We use simultaneous equations to control for interrelationships between dependent variables in addition to single equation OLS and logistic regression models. Our results are particularly strong in tests using samples of small firms whose auditor choice is not constrained by the need to appoint a top tier auditor to ensure the auditor's financial independence of the client.

Keywords: Auditors, Specialization, Auditor Choice, Research and Development

JEL Classification: M420

Suggested Citation

Godfrey, Jayne M. and Hamilton, Jane Maree, The Impact of R&D Intensity on Demand for Specialist Auditor Services (November 2003). Available at SSRN: https://ssrn.com/abstract=615401 or http://dx.doi.org/10.2139/ssrn.615401

Jayne M. Godfrey

University of Auckland ( email )

12 Grafton Road
Auckland, 1010
New Zealand

Jane Maree Hamilton (Contact Author)

La Trobe University ( email )

PO Box 199
Bendigo, Victoria 3550
Australia
61 3 54447292 (Phone)
61 3 54 447998 (Fax)

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