Agency Costs and Audit Pricing: Evidence on Discretionary Accruals

30 Pages Posted: 26 Feb 1998

See all articles by Ferdinand A. Gul

Ferdinand A. Gul

Monash University Sunway Campus

Judy S.L. Tsui

Hong Kong Polytechnic University - School of Accounting and Finance

Charles J.P. Chen

City University of Hong Kong (CityU) - Department of Accountancy

Date Written: July 1997

Abstract

This paper tests four hypotheses: (1) there is a positive association between the magnitude of discretionary accruals and audit fees, (2) this positive association is stronger for Big 6 auditees than for Non-Big 6 auditees, (3) there is a negative association between family ownership of companies and audit fees, and (4) there is a negative association between the percentage of independent non-executive directors and audit fees. The first two hypotheses are based on the assumption that when managers manipulate accruals to conceal poor performance or postpone earnings to future years, auditors revise upwards their assessments of inherent risk which will result in higher audit fees. More specifically, the second hypothesis is based on the premise that Big 6 auditors have more reputation capital to protect than Non-Big 6 auditors. Hypotheses three and four rely on the assumption that as a result of higher monitoring and lower agency costs associated with family ownership and higher percentage of non-executive directors, auditors assess lower levels of inherent risks and charge lower audit fees. Results using 134 company-year observations from 67 companies provide support for all four hypotheses.

JEL Classification: G32, M41, M49

Suggested Citation

Gul, Ferdinand A. and Tsui, Judy S.L. and Chen, Charles Jieping, Agency Costs and Audit Pricing: Evidence on Discretionary Accruals (July 1997). Available at SSRN: https://ssrn.com/abstract=62750 or http://dx.doi.org/10.2139/ssrn.62750

Ferdinand A. Gul

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

Judy S.L. Tsui (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
852 2766 7828 (Phone)
852 2334 7830 (Fax)

Charles Jieping Chen

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China
+852 2788-7909 (Phone)
+852 2788-7944 (Fax)