Audit fee residuals: Costs or rents?

Audit fee residuals: Costs or rents? Audit fee residuals (the error term from audit fee models) are widely used in the accounting research literature. Researchers, however, have adopted contrasting views of these fee residuals. One view is that fee residuals are a combination of noise and auditor rents (i.e., abnormal profits), while the other view is that they are a combination of noise and unobserved audit costs (including any risk premium and a normal rate of return on all factors of production). As a result, identical research findings are presently given conflicting policy interpretations. We use differences in fee residual persistence across continuing and new audit engagements to elucidate the extent to which fee residuals consist of unobserved audit costs, auditor rents, and noise elements. In a large sample of U.S. public company audit engagements, we find evidence suggesting that fee residuals largely consist of researcher-unobserved audit production costs common to all auditors. We discuss the implications of this finding for policy setters and for future auditing research. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Audit fee residuals: Costs or rents?

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Publisher
Springer US
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-015-9322-2
Publisher site
See Article on Publisher Site

Abstract

Audit fee residuals (the error term from audit fee models) are widely used in the accounting research literature. Researchers, however, have adopted contrasting views of these fee residuals. One view is that fee residuals are a combination of noise and auditor rents (i.e., abnormal profits), while the other view is that they are a combination of noise and unobserved audit costs (including any risk premium and a normal rate of return on all factors of production). As a result, identical research findings are presently given conflicting policy interpretations. We use differences in fee residual persistence across continuing and new audit engagements to elucidate the extent to which fee residuals consist of unobserved audit costs, auditor rents, and noise elements. In a large sample of U.S. public company audit engagements, we find evidence suggesting that fee residuals largely consist of researcher-unobserved audit production costs common to all auditors. We discuss the implications of this finding for policy setters and for future auditing research.

Journal

Review of Accounting StudiesSpringer Journals

Published: Mar 26, 2015

References

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