Abnormal Fees and Timely Loss Recognition - A Long-Term Perspective

Abstract

We examine the relation between timely loss recognition and abnormal audit, non-audit, and total fees over a long period (2001–2007 and 2010–2015). We use positive abnormal audit fees as a measure of abnormal audit effort, and positive abnormal non-audit fees as a measure of economic bond between the auditor and the auditee. Using the Ball and Shivakumar (2006) model, we report some evidence suggesting audit effort is associated with slower loss recognition in accruals before the Sarbanes–Oxley Act (SOX) became effective. However, we find stronger evidence that audit effort is associated with slower loss recognition post-SOX when clients raise substantial external funds or when the auditor is not an industry specialist. Using C_Score, we find a negative association between changes in abnormal audit fees and total fees, and changes in C_Score post-SOX, but not pre-SOX. We find no sample-wide evidence that abnormal non-audit fees are associated with the speed of loss recognition. Collectively, the results suggest post-SOX auditors exert more effort when losses are delayed and that non-audit services do not compromise auditor independence.