Rev Quant Finan Acc (2006) 27:235–266
The joint determination of audit fees, non-audit fees,
and abnormal accruals
Rick Antle · Elizabeth Gordon ·
Ganapathi Narayanamoorthy · Ling Zhou
Springer Science + Business Media, LLC 2006
Abstract Prior research has estimated piece-meal the determinants of audit fees, non-
audit fees and abnormal accruals. Intuition, informal analysis, and a variety of theories
suggest that audit fees, non-audit fees, and abnormal accruals are jointly determined.
We address this endogeneity issue by modeling the conﬂuence of audit fees, fees for
non-audit services and abnormal accruals in a system of simultaneous equations.
Our joint estimation provides a starting point to look simultaneously at several
competing theories. Using audit and non-audit fee data from the UK for 1994–2000,
we ﬁnd evidence consistent with knowledge spillovers (or economies of scope) from
auditing to non-audit services and from non-audit services to auditing. While knowl-
edge spillovers from non-audit services to auditing have been found in prior research
[e.g. see Simunic, 1984], the presence of knowledge spillovers from auditing to non-
audit services is a new result. Contrary to recent results in Ferguson et al. (2000) and
Frankel et al. (2002), we do not ﬁnd support for the assertion that fees for non-audit
services increase abnormal accruals. In fact, contrary to the results in Ashbaugh et al.
(2003) and Chung and Kallapur (2003), we ﬁnd that non-audit fees decrease abnormal
accruals, which we attribute to the productive effects of non-audit services. We also
ﬁnd evidence that audit fees increase abnormal accruals, consistent with behavioral
theories of unconscious inﬂuence or bias in the auditor-client relation. The ﬁndings
are robust to tests with US data.
Yale School of Management
Rutgers Business School, Newark & New Brunswick
G. Narayanamoorthy (
Yale School of Management,
New Haven, CT 06520-8200