Title

Non-Audit Fees, Institutional Monitoring, and Audit Quality

Publication Type

Journal Article

Publication Date

12-2012

Abstract

We posit that the effect of non-audit fees on audit quality is conditional on the extent of institutional monitoring. We suggest that institutional investors have incentives and the ability to monitor financial reporting quality. Because of the reputation concerns and potential litigation exposure, auditors are likely to provide high audit quality, when they also provide non-audit services to clients, particularly when clients are subject to high institutional monitoring. We find evidence that, as non-audit fees increase, audit quality (measured by performance-adjusted discretionary current accruals and earnings-response coefficients) reduces only for clients with low institutional ownership but not for clients with high institutional ownership. Our results are robust after controlling for auditor industry specialization, firms’ operating volatility, size effect, and potential endogeneity between institutional ownership and audit quality.

Keywords

Audit quality, Auditor independence, Discretionary accruals, Earnings return relation, Institutional investors

Discipline

Accounting | Business Law, Public Responsibility, and Ethics | Corporate Finance

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

Review of Quantitative Finance and Accounting

Volume

41

Issue

2

First Page

343

Last Page

384

ISSN

0924-865X

Identifier

10.1007/s11156-012-0312-1

Publisher

Springer