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?

Loading next page...
 
/lp/springer_journal/audit-fee-residuals-costs-or-rents-6i38ODd2UM
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

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 12 million articles from more than
10,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Unlimited reading

Read as many articles as you need. Full articles with original layout, charts and figures. Read online, from anywhere.

Stay up to date

Keep up with your field with Personalized Recommendations and Follow Journals to get automatic updates.

Organize your research

It’s easy to organize your research with our built-in tools.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve Freelancer

DeepDyve Pro

Price
FREE
$49/month

$360/year
Save searches from
Google Scholar,
PubMed
Create lists to
organize your research
Export lists, citations
Read DeepDyve articles
Abstract access only
Unlimited access to over
18 million full-text articles
Print
20 pages/month
PDF Discount
20% off