A new measure of accounting quality
Published online: 8 October 2013
Ó Springer Science+Business Media New York 2013
Abstract This study develops a measure of accounting quality based on audit fees.
Adopting a neoclassical view of the audit market, we argue that unexplained audit
fees should contain information about accounting quality. We ﬁnd that our measure
of unexplained audit fees correlates positively with other empirical measures of
quality. We further show that our measure of accounting quality is incrementally
predictive of fraud, restatements, and SEC comment letters, controlling for other
measures of quality. Overall, we believe that the information in audit fees can be
used to provide an alternative measure of a ﬁrm’s accounting quality.
Keywords Accounting quality Á Earnings management Á Restatements Á
JEL Classiﬁcation M41
This study investigates whether audit fees can be used to construct a summary
measure of accounting quality. Economic theory suggests that, in a competitive
equilibrium, audit fees incorporate the expected cost of poor quality earnings.
P. Hribar (&)
Tippie College of Business, The University of Iowa, Iowa City, IA 52242, USA
Naveen Jindal School of Management, University of Texas at Dallas, Richardson, TX 75080, USA
Lundquist College of Business, University of Oregon, Eugene, OR 97403, USA
Rev Account Stud (2014) 19:506–538