Audit fee residuals: Costs or rents?

Rajib Doogar (), Padmakumar Sivadasan () and Ira Solomon ()
Additional contact information
Rajib Doogar: University of Washington Bothell
Padmakumar Sivadasan: Tulane University
Ira Solomon: Tulane University

Review of Accounting Studies, 2015, vol. 20, issue 4, No 1, 1247-1286

Abstract: 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.

Keywords: Audit fees; Audit fee residuals; Auditor rents; Audit costs; Fee discounting (search for similar items in EconPapers)
JEL-codes: L11 L12 M41 M42 M48 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-015-9322-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reaccs:v:20:y:2015:i:4:d:10.1007_s11142-015-9322-2

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-015-9322-2

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().