Audit Journal

Auditing: A Journal of Practice & Theory Vol. 29, No. 2 November 2010 pp. 115–140

American Accounting Association DOI: 10.2308/aud.2010.29.2.115

Do Abnormally High Audit Fees Impair Audit Quality?
Jong-Hag Choi, Jeong-Bon Kim, and Yoonseok Zang
SUMMARY: This study examines whether and how audit quality proxied by the magnitude of absolute discretionary accruals is associated with abnormal audit fees, that is, the difference between actual audit fee and the expected, normal level of audit fee. The results of various regressions reveal that the association between the two is asymmetric, depending on the sign of the abnormal audit fee. For observations with negative abnormal audit fees, there is no significant association between audit quality and abnormal audit fee. In contrast, abnormal audit fees are negatively associated with audit quality for observations with positive abnormal audit fees. Our findings suggest that auditors’ incentives to deter biased financial reporting differ systematically, depending on whether their clients pay more than or less than the normal level of audit fee. Our results are robust to a variety of sensitivity checks. Keywords: audit quality; abnormal audit fees; earnings management. Data Availability: Data are publicly available from sources identified in the paper.

INTRODUCTION his study examines whether the association between audit fees and audit quality is asymmetric and thus nonlinear in the sense that the association is conditioned upon the sign of abnormal audit fees. We define abnormal audit fees as the difference between actual audit fees i.e., actual fees paid to auditors for their financial statement audits and the expected, normal level of audit fees. Actual audit fees consist of two parts: 1 normal fees that reflect auditors’

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Jong-Hag Choi is an Associate Professor at Seoul National University, Jeong-Bon Kim is a Chair Professor at City University of Hong Kong, and Yoonseok Zang is an Assistant Professor at

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