Impact of Abnormal Audit Fees on Earnings Management Practices: Evidence from Non-Financial Listed Companies in Sri Lanka

Abstract

Abnormal audit fees could be claimed to be an incentive to compromise the independence of an external auditor, which impairs the quality of an audit. Alternatively, some have argued that abnormal audit fees reflect the additional effort of the auditors to reduce earnings management practices. Hence, this study aimed to examine the relationship between abnormal audit fees and the degree of earnings management of non-financial listed companies in Sri Lanka. Using a quantitative approach in the positivistic paradigm, descriptive statistics, correlation analyses, regression analyses, and panel regression analyses were performed in assessing the level and identifying the relationship between abnormal audit fees and earnings management. Results indicated that the abnormal audit fees in the Sri Lankan context are comparatively higher than in selected developing and developed countries and that degree of earnings management vary over time. Moreover, none of the analyses performed showed a statistically significant relationship between abnormal audit fees and the degree of earnings management in Sri Lanka. The findings of this study are expected to provide insights to regulatory bodies, audit firms, investors, and other stakeholders. Regulators and policymakers could take steps to discourage excessive audit fees, as well as address the usage of unwarranted earnings management practices. Furthermore, external auditors' efforts to curtail excessive earnings management practices should be further examined. This study is a pioneering effort to identify whether there is a relationship between abnormal audit fees and earnings management in Sri Lanka, and thus it is expected to add to the extant literature, especially in a developing country context.