Abnormal Audit Fees and Stock Price Crash Risk

Abstract

This paper aims to interpret abnormal audit fees by examining the effect of earnings smoothing strategies and auditor specialisation on the association between abnormal audit fees and stock price crash risk. We estimate ordinary least squares fixed effects regression models to examine the association between stock price crash risk and accrual-based and real earnings smoothness, unexplained audit fees, and their interaction terms. The results provide the support that: a) if abnormal audit fees proxy for increased audit effort, then increased audit effort is effective at mitigating accrual-based earnings smoothing crash risk; b) the mitigation is limited to highquality/industry specialist auditors; c) the higher abnormal audit fees are actually a risk premium to compensate auditors for crash risk associated with non-accrual-based earnings management. The study adds to the debate of whether abnormal audit fees proxy for auditor quality, auditor effort, the economic relationship between auditor and client, or risk premium.