The Relationship Between Audit Fees and Earnings Quality of Financial Institutions

Abstract

Literature on auditing has proposed that audit fees are a proxy for audit quality. Auditors who charge higher fees might provide a higher quality audit, either related to a fee premium for specialization or as compensation for providing a higher level of effort. A contrary view might be taken; auditors who charge higher fees might be economically reliant on those fees and allow clients more latitude in reporting earnings. Overall, our findings show that bank firms that pay relatively higher audit fees have lower earnings quality in terms of discretionary accruals.