Goodwill Impairment Losses and Audit Fees

Abstract

This paper examines whether goodwill accounting is related to auditor compensation. Specifically, it investigates whether goodwill impairment losses reported by auditees are associated with audit fees they have to pay their auditors. I predict a positive link between the amount of goodwill impairments reported by client firms and audit fees that auditors charge them. Goodwill impairment charges are likely to diminish financial reporting quality because they are susceptible to managerial opportunism and, thus, auditors are likely to consider them posing higher audit risk. Responding to higher risk of material misstatements in the financial statements of auditees, auditors are likely to increase audit effort as well as audit fees. Consistent with the prediction, the results show that goodwill impairment losses are positively associated with audit fees.