Abnormal audit fees and audit quality: Australian evidence

Abstract

We examine the association between abnormal audit fees and audit quality using Australian data. We find that audit quality, measured by auditors’ propensity to issue going concern opinions for financially distressed companies, discretionary accruals, and clients’ propensity to meet or beat earnings benchmarks, declines as positive abnormal audit fees increase in magnitude. Our findings support an economic bonding argument that positive abnormal audit fees reflect the extent of economic bonding between the auditor and the client. We also find that negative abnormal audit fees are negatively associated with the absolute value of discretionary accruals. Our findings suggest that academic researchers, practitioners, regulators, and others interested in assessing the effect of auditor remuneration on auditor independence and audit quality should be concerned with audit fees that are above a normal level rather than audit fees that are below a normal level of audit fees.

JEL Classification: M42, M49