The Association between Audit Fees and Client-Firms' Attributes of Earnings

This study investigates the effect on the audit fees of a client-firm’s earnings quality. Specifically, we postulate that more desirable attributes of earnings, measured by seven comprehensive measures of accrual quality, earnings persistence, predictability, smoothness, value relevance, timeliness, and conservatism, are associated with the lower audit risk in verifying the client-firm’s financial reports, proxied by a lower audit fee. Empirical results for a large sample of U.S. publicly listed firms support the hypothesis that auditors in general charge lower audit fees to firms with more desirable attributes of earnings than to firms with less favorable earnings qualities. The results also suggest that auditors give more weight to the earnings attributes caused by economic fundamentals (innate sources) than those induced by management choices (discretionary sources) in assessing audit risk, which in turn is reflected in the audit fees