Audit Fees and Corporate Innovation

Abstract

We investigate the extent to which a client’s innovative effort affects the level of audit effort and whether the innovative-effort efficiency can attenuate the demand for greater audit effort associated with a client’s risky research-and-development (R&D) investments. We find that a client firm’s strategic emphasis on corporate innovations may require greater audit effort, but the efficiency of a firm’s innovative effort can attenuate the demand for heightened audit effort against risky, innovative efforts. Findings suggest that the external auditor does not always discourage corporate innovation as the efficiency of a firm’s innovation may lower the client business risk perceived by an auditor. Our contribution to a stream of literature is identifying facilitators and impediments to corporate innovation. Also, using the number of patents granted/cited as an output measure of a firm’s innovative effort, we extend understanding of the influence of a firm’s business strategies on the level of audit effort.

Keywords: Corporate innovation, Auditors, Research and development, Risk management

JEL Classification: M41, M42