Articulation-Based Accruals and Audit Fees

Abstract

This paper examines the relation between audit fees and accruals from a balance sheet auditing perspective. We argue that the underlying economic characteristics of various transactions, as reflected in the articulation-based accruals in Casey et al. (2017), are predictably associated with audit fees. We are the first to demonstrate that total accruals have a non-linear relation with audit prices, with both large positive and large negative total accruals driving audit fees higher. We further disaggregate total accruals based on their accounting and economic characteristics. Accruals originating from the balance sheet and the cash flow statement have a positive relation with audit fees, while the statement of owner’s equity accruals are negatively related to audit fees. We then decompose total accruals into five articulation-based accruals and find that working capital accruals, discontinued operations accruals, and net financial accruals have a linear relationship with audit fees. In contrast, equity investment accruals and net noncurrent operating accruals (mainly driven by depreciation expenses) have a non-linear relationship with audit fees.