Abnormal Audit Fees and Audit Quality: Evidence from the Korean Audit Market
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Date
2020-10
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American Accounting Association
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Abstract
Do abnormally high or low audit fees reflect audit quality? Prior literature examining the
U.S. audit market offers conflicting evidence in response to this question. In this paper, we re- examine this issue after controlling for the confounding effect of audit hours by using a sample of public firms in the Korean audit market, which publicly discloses both audit fees and audit hour information. While we do not find a significant association between abnormally high audit fees and audit quality, we find that abnormally low audit fees are associated with larger discretionary accruals and a higher likelihood of meeting or beating analyst earnings forecasts. Further, we find evidence showing that the relationship between abnormally low audit fees and audit quality indicators persists regardless of the level of audit hours. To the extent that audit hours represent the amount of audit effort exerted during an audit engagement, these findings suggest that greater audit effort alone may not lead to higher audit quality as fee pressure from abnormally low audit fees may discourage the provision of high-quality audit services.
Keywords: abnormal audit fees; audit effort; audit quality; audit hours
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Behrend, Matt, Khan, Sarfraz, Ko, Youngwoo, and Park, Sung-Jin. “Abnormal Audit Fees and Audit Quality: Evidence from the Korean Audit Market.” Journal of International Accounting Research 19:3 October 2020.
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