The Differential Effects of Auditors' Nonaudit and Audit Fees on Accrual Quality*

By Bin Srinidhi, Ferdinand A. Gul. 2007

335 citations recorded by the source corpus.

This paper examines linkages between the audit and non-audit fees and accrual quality. We measure accrual quality by the Francis et al. (2005) modification of Dechow and Dichev (2002) measure. We posit that in settings where audit quality is compromised by a loss of auditor independence, managers use accruals more opportunistically and thereby drive down the accrual quality. Conversely, higher audit effort and quality translate to a better accrual quality. Our dependent variables are the relative magnitude of non-audit fees to audit fees, the absolute magnitudes of audit, non-audit and total fees. Results show that accrual quality has a significant negative association with the magnitude of non-audit fees but a significant positive association with audit fees. This latter result is consistent with the proposition that higher audit fee reflects higher audit effort and better judgments about the propriety of accruals, but is not consistent with the proposition that audit fee is associated with economic bonding.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/a4409bd9addd764efa947b066711f30314921fdc

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In Accounting

1. J. Stewart
2. Ebraheem Saleem Salem Alzoubi
3. P. Kent
4. J. Routledge
5. Vito Mollica
6. Ting‐Chiao Huang
7. Jeng-Ren Chiou
8. Lingzi Lin

In Strategy and Management

1. J. Stewart
2. P. Kent
3. Ebraheem Saleem Salem Alzoubi
4. Ting‐Chiao Huang
5. Jeng-Ren Chiou
6. Lingzi Lin
7. Hsihui Chang
8. J. Routledge

Citations in the corpus

• Auditor Independence and Audit Quality (2015, background): “Some find that higher NAS fees are associated with lower accrual quality (e.g., Frankel, Johnson, & Nelson, 2002; Srinidhi & Gul, 2007).”
• Audit Market Concentration, Audit Fees, and Audit Quality: Evidence from China (2016, background): “Consistently, higher audit fees are found to be associated with lower discretionary accruals (Larcker and Richardson 2004), higher earnings quality (Higgs and Skantz 2006), and better accruals quality (Srinidhi and Gul 2007).”
• Audit quality, debt financing, and earnings management: Evidence from Jordan (2017, background): “Srinidhi and Gul (2007) contended that the auditing market is well-regulated compared to the non-auditing market since the auditing of AC CE PT ED M AN US CR IP T listed companies is mandatory.”
• Does Auditor Tenure Improve Audit Quality? Moderating Effects of Industry Specialization and Fee Dependence (2009, neutral): “The same model has also been used in recent studies (e.g., Srinidhi and Gul 2007; Francis et al. 2005).”
• The Impact of CEO Narcissism on Earnings Management (2018, positive): “…et al. (2013) and Stubben (2010), who model the difference in actual and predicted accruals:4 The magnitude of discretion (earnings management) is scaled by average total assets of firm i in years t and t–1, consistent with the empirical literature (Srinidhi and Gul, 2007; Srinidhi et al., 2011).”