Are Extensive Audits 'Good News'? Market Perceptions of Abnormal Audit Fees and Fair Value Disclosures

Ulf Mohrmann (ulf.mohrmann@uni-konstanz.de), Jan Riepe (riepe@bwl.lmu.de) and Ulrike Stefani (ulrike.stefani@uni-konstanz.de)
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Ulf Mohrmann: Department of Economics, University of Konstanz, Germany
Jan Riepe: Munich School of Management, University of Munich, Germany
Ulrike Stefani: Department of Economics, University of Konstanz, Germany

No 2013-08, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: Although the role of auditing is to increase the reliability of financial statements, surprisingly little is known about addressees’ perceptions of the auditor-client relationship. Using a sample of more than 1,000 U.S. bank-years from 2008 to 2011, we analyze the economic consequences of the joint announcement of audit fees and the level breakdown of fair value assets. We confirm prior findings that audit fees are higher for banks with larger proportions of Level 3 fair values. Moreover, we find that the market perception regarding fair value assets depends on the extent of managerial discretion in the estimation process. Most importantly, we find evidence consistent with the notion that addressees’ interpret abnormal audit fees as an indication of additional risk. Thus, unexpected audit fees are not interpreted as a signal for a more reliable audit, but further increase the market discount on Level 3 fair values. Bank managers have to consider these negative consequences in their reporting strategy.

Keywords: Audit Fees; Fair Value Accounting; Fair Value Hierarchy; Banks; Valuation (search for similar items in EconPapers)
JEL-codes: G21 M41 M42 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2013-04-23
New Economics Papers: this item is included in nep-acc
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Citations: View citations in EconPapers (1)

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