Abnormal Audit Fees and Audit Quality: Evidence from the Korean Audit Market

Abstract

ABSTRACT Do abnormally high or low audit fees reflect audit quality? In this paper, we re-examine this issue after controlling for the confounding effect of audit hours by using a sample of public firms in the Korean audit market, which publicly discloses both audit fees and audit hour information. While we do not find a significant association between abnormally high audit fees and audit quality, we find that abnormally low audit fees are associated with larger discretionary accruals and a higher likelihood of meeting or beating analyst earnings forecasts. Further, we find that the relationship between abnormally low audit fees and audit quality indicators persists regardless of the level of audit hours. To the extent that audit hours represent audit effort, these findings suggest that greater audit effort alone may not lead to higher audit quality as fee pressure from abnormally low fees may discourage the provision of high-quality audit services. JEL Classifications: M42; M48.