Article1993

AUDITOR CHOICE AND AUDIT FEE DETERMINANTS

48 citations0/0 files storedJournal of Business Finance &amp Accounting

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Auditing, Earnings Management, Governance Accounting and Organizational Management Corporate Governance and Financial Management

Abstract

An analytical model predicts that cross‐sectionally (1) the marginal cost of auditor quality is inversely related to the strength of client companies' internal control. (2) In the short run, clients with stronger control, lower business risk, or less complex audits choose higher quality auditors; but whether they pay higher audit fees is indeterminate. (3) In the long run, client companies have both lower quality auditors and weaker controls as risk or complexity increase, so less precise financial reporting is expected from them. (4) The effects of risk and complexity on fees are indeterminate, because the price and quantity components of fees tend to vary inversely as risk or complexity change. The predictions are consistent with findings that have been viewed as empirical anomalies.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1980Agency Problems and the Theory of the Firm 1981Auditor size and audit quality 1980The Pricing of Audit Services: Theory and Evidence 1986Information quality and the valuation of new issues 1986Audit Fees and Auditor Size: Further Evidence 1987The Consequences of the Dependence of Quality on Price 1982Financial Reporting: An Accounting Revolution.

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