R&D capitalization and audit fees: Evidence from China

Jia-Chi Cheng, Chia-Chi Lu and Nan-Ting Kuo

Advances in accounting, 2016, vol. 35, issue C, 39-48

Abstract: Our study investigates the association between capitalized R&D costs and audit fees and whether this association reflects the effect of earnings management. By exploring Chinese listed firms, we find that capitalized R&D costs are positively associated with audit fees, where such positive association holds for both the discretionary and nondiscretionary portions of capitalized R&D costs. Moreover, the positive association between the discretionary portion of capitalized R&D costs and audit fees is more pronounced for firms with stronger incentives to manipulate earnings. Overall, our findings imply that firms' reporting incentives affect how auditors react to clients' accounting choices. This in turn suggests that auditors believe some firms capitalize R&D to manipulate earnings, and the resulting earnings-management concerns lead them to charge higher fees.

Keywords: Capitalized development costs; Earnings Management; Audit fees; Regulation of Stock Markets (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:35:y:2016:i:c:p:39-48

DOI: 10.1016/j.adiac.2016.05.003

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