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Income smoothing and audit fees
Journal article   Peer reviewed

Income smoothing and audit fees

Hsihui Chang, L.C. Jennifer Ho, Zenghui Liu and Bo Ouyang
Advances in accounting, v 54, 100547
Sep 2021
DOI: https://doi.org/10.1016/j.adiac.2021.100547

Abstract

Audit fees Earnings management Income smoothing Signaling
In this study, we examine the effect of income smoothing on auditors' pricing decisions. Analyzing a sample of 12,823 firm-year observations from U.S. companies in non-regulated industries for the period 2000–2018, we find that income smoothing is negatively associated with audit fees, suggesting that auditors favorably view smoothed earnings. This result holds when we control for other variables that have been identified as determinants of audit fees in prior literature, including client-specific (e.g., client size, audit complexity, litigation risk, and corporate governance), auditor-specific (e.g., auditor quality, auditor tenure, and auditor expertise), and engagement-specific (e.g., audit opinion, busy season, reporting lag) factors. Our results also hold across (1) alternative smoothing measures (with and without considering the use of accruals to smooth earnings), (2) different sources of income smoothness (innate vs. discretionary components) and (3) various robustness tests. Overall, our evidence supports the notion that auditors perceive income smoothing as signaling rather than opportunistic behavior, and thus charge lower audit fees. To our knowledge, this is the first study that examines income smoothing directly from the perspective of auditors.

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13 citations in Web of Science
13 citations in Scopus

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Collaboration types
Domestic collaboration
Web of Science research areas
Business, Finance
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