（2007）Auditor fees and audit quality.pdfVIP

The current issue and full text archive of this journal is available at /0268-6902.htm Auditor fees and audit quality Auditor fees and audit quality Rani Hoitash Department of Accountancy, Bentley College, Waltham, Massachusetts, USA, and Ariel Markelevich and Charles A. Barragato 761 Long Island University, Brookville, New York, USA Abstract Purpose – The paper aims to examine the relation between fees paid to auditors and audit quality during the period of 2000-2003. Design/methodology/approach – The paper constructs a measure of auditor profitability that is used as a proxy for auditor independence. The methodology is grounded in the notion that auditor independence is influenced by effort and risk-adjusted fees, rather than the level of fees received from clients. Since, risk and effort are unobservable, the paper uses proxies based on client size, complexity and risk to estimate abnormal fees. Abnormal fees are derived using a fee estimation model drawn from prior literature. The paper employs two metrics to assess audit quality – the standard deviation of residuals from regressions relating current accruals to cash flows and the absolute value of performance-adjusted discretionary accruals. Findings – The paper documents a statistically significant negative association between total fees and both audit quality proxies over all years. These findings are robust to a variety of additional tests and several alternative design specifications.