Research and Development Intensity and Audit Fees

Research and Development Intensity and Audit Fees

This study provides evidence on whether audit fees vary in response to the intensity of research and development (R&D) expenditure and whether some other factors, such as expert auditor, may moderate the relationship between R&D intensity and audit fees. Our evidence indicates that there is a positive relationship between R&D intensity and audit fees and hiring an industry specialist auditor may attenuate the relationship. Our findings sugge*st that auditors charge a premium for heightened audit risk and increased audit efforts related to R&D intensity.

___

  •  Abbott, L.J., Parker S, Peters, G.F. and Raghunandan, K.(2003). The Association between Audit Committee Characteristics and Audit Fees. Auditing: A Journal of Practice & Theory,Vol.22 (2): 17-32
  •  Bell, T.B., Landsman, W. and Shackelford, D.A.(2001). Auditors’ Perceived Business Risk and Audit Fees: analysis and Evidence. Journal of Accounting Research,Vol.39(1):35–43.
  •  DeAngelo, L. (1981). Auditor Size and Auditor Quality. Journal of Accounting and Economics, Vol. 3(3): 183–99.
  •  DeFond, M. (1992). The Association between Changes in Client Firm Agency Costs and AuditorSwitching. Auditing: A Journal of Practice and Theory, Vol.11 (1): 16–
  •  Fields, L.P., Fraser, D.R. and Wilkins M.(2004). An Investigation of the Pricing of Audit Services for Financial Institutions. Journal of Accounting and Public Policy, Vol.23(1):53-77
  •  Francis, J., Maydew, E. and Sparks, H.C. (1999). The Role of Big 6 Auditors in the Credible Reporting of Accruals. Auditing: A Journal of Practice and Theory, Vol.18 (2): 17–34.
  •  Francis, J., and Wilson, E.(1988). Auditor Changes: A Joint Test of Theories Relating to AgencyCosts and Auditor Differentiation. The Accounting Review, Vol.63 (4): 663–82.
  •  Frankel, R. and Li, X.(2004). Characteristic of a Firm’s Information Environment and the Information Asymmetry between Insiders and Outsiders, Journal of Accounting and Economics, Vol.37, 229-259.
  • Froot, K.A., David, S.S. and Jeremy, C. S., (1993). Risk Management: Coordinating Corporate Investment and Financing Policies, Journal of Finance, Vol.48, 162919
  •  Gow, I.D., Ormazabal, G. and Taylor, D.J. (2010). Correcting for Cross-Sectional and Time-Series Dependence in Accounting Research. The Accounting Review, Vol. 85 (2):483-512
  •  Godfrey, J.M. and J. Hamilton. (2005). The Impact of R&D Intensity on Demand for Specialist Auditor Services. Contemporary Accounting Research, Vol. 22 (1), pp. 55-93.
  •  Hay, D., Knechel, W.R. and Wong N. (2006). Audit Fees: A Meta-analysis of the Effect of Supply and Demand Attributes. Contemporary Accounting Research, Vol. 23 (1), pp. 141-191.
  •  Himmelberg, C. P. and Petersen, B.C. (1994). R&D and Internal Finance: a Panel Study of Small Firms in High-tech Industries. Review of Economics and Statistics, Vol.76: 38-51.
  •  Holmstrom, B. (1989). Agency Costs and Innovation. Journal of Economic Behavior and Organization, Vol.12, 305-327.
  •  Johnson, W.B. and Lys, T. (1990). The Market for Audit Services: Evidence from VoluntaryAuditor Changes. Journal of Accounting and Economics, Vol.12 (1–3): 281–308.
  •  Kothari S.P.,Leone A.J. and Wasley, C.E. (2005). Performance Matched Discretionary Accrual Measures. Journal of Accounting and Economics, Vol 39: 163-197
  •  Krishnan, G.V., Sun, L., Wang, Q. and Yang, R. (2013). Client Risk Management: A Pecking Order Analysis of Auditor Response to Upward Earnings Management Risk. Auditing: A Journal of Practice & Theory, Vol. 32 (2):147-169
  •  Mayhew, B.W. and Wilkins, M.S. (2004). Audit Firm Industry Specialization as a Differentiation Strategy: Evidence from Fees Charged to Firms Going Public. Auditing: A Journal of Practice & Theory, Vol. 22 (2):33-52
  •  Petersen, M.A. (2009). Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches. Review of Financial Studies. Vol. 22(1): 435-480
  •  Reichelt, K.J. and Wang, D. (2009). National and Office-Specific Measures of Auditor Industry Expertise and  Effects on Audit Quality, Journal of Accounting Research, Vol.48(3):647-686
  •  Shi, C. (2003). On the Trade-off between the Future Benefits and Riskiness of R&D: A Bondholders’ Perspective.
  •  Journal of Accounting and Economics, Vol. 35, 227-254.  Simunic, D. (1980). The pricing of audit services: theory and evidence. Journal of Accounting Research, Vol.18(1):161–190.
  • Tsui, J., Jaggi, B., and Gul, F. (2001). CEO domination, growth opportunities, and their impact on audit fees.Journal of Accounting, Auditing and Finance, Vol.16(3):189–203.