The Association between Audit Quality and Abnormal Audit Fees

57 Pages Posted: 16 Nov 2005

See all articles by Jong-Hag Choi

Jong-Hag Choi

Seoul National University - College of Business Administration

Jeong-Bon Kim

City University of Hong Kong

Yoonseok Zang

Singapore Management University - School of Accountancy

Date Written: July 2006

Abstract

Using a sample of 9,820 firm-year observations over the 2000-2003 period, this paper examines whether, and how, audit quality proxied by unsigned discretionary accruals is associated with the abnormal audit fee, i.e., the difference between actual audit fee and auditors' expectation on the normal level of fee. The results of various regressions reveal that the association between the two is insignificant for the full sample, significantly positive for the subsample of clients with positive abnormal fees, and insignificantly negative for the subsample of clients with negative abnormal fees. The above results suggest that auditors' incentives to compromise audit quality differ systematically depending on whether the clients pay more than or less than the normal level of audit fees, which in turn leads to the audit fee-audit quality association being conditioned on the sign of abnormal audit fees. Our results are robust to a battery of sensitivity checks. Relevant implications of our results to policy makers and academic researchers are discussed.

Keywords: Audit quality, Audit and non-audit services, Abnormal audit fees, Earnings management

JEL Classification: M49, M41, M43, L84

Suggested Citation

Choi, Jong and Kim, Jeong-Bon and Zang, Yoonseok, The Association between Audit Quality and Abnormal Audit Fees (July 2006). Available at SSRN: https://ssrn.com/abstract=848067 or http://dx.doi.org/10.2139/ssrn.848067

Jong Choi (Contact Author)

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Yoonseok Zang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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