Abnormal Audit Fee and Audit Quality

Abstract

This study tests the hypothesis that below-normal audit fees signal important nuances in the balance of bargaining power between the auditor and the client, and that such power may ultimately influence audit quality. We find that audit quality, proxied by absolute discretionary accruals and meeting or beating analysts' earnings forecasts, declines as negative abnormal audit fees increase in magnitude, with the effect amplified as proxies for client bargaining power increase. We find that this effect is dampened in years following the Sarbanes-Oxley Act (SOX), suggesting that SOX was effective in enhancing auditor independence.

Keywords: abnormal audit fees, audit quality, client bargaining power, economic bonding, SOX

JEL Classification: M41, M42