The Volatility of Other Comprehensive Income and Audit Fees

Abstract

SYNOPSIS The volatility in other comprehensive income (OCI) reflects how market-related price movements, such as exchange rate and equity price changes, affect a firm's future profits. Hence, firms with higher volatility of OCI are likely to have higher inherent risk. Using hand-collected data from 2002–2006, we find that the volatility of OCI is positively associated with audit fees and provides significant incremental explanatory power for audit fees over and above the level of OCI and the volatility of net income. We also find that the effect of the volatility of each component of OCI on audit fees is consistent with the prediction of how it might affect a firm's future profits. Our results support recent efforts by the International Accounting Standards Board (IASB) to require firms to present separately OCI components that may affect future earnings from those that may not affect future earnings.