Earnings autocorrelation, earnings volatility, and audit fees

Document Type

Article

Publication Date

8-1-2018

Abstract

This study proposes that earnings autocorrelation and earnings volatility are associated with audit fees. Autocorrelation and volatility are time-series of earnings characteristics that may affect an auditor’s perception of inherent risk. In response to greater inherent risk, auditors should conduct more extensive substantive testing to reduce the overall risk associated with the audit. We find a negative (positive) association between earnings autocorrelation (volatility) and audit fees. The results indicate that a shift in the interquartile range in earnings autocorrelation and earnings volatility combined is associated with a 4.0 percent change in audit fees, which amounts to approximately $95,600 for the average firm-year observation in our primary sample. We also find that the relation between earnings autocorrelation and audit fees is attenuated for industry-specialist auditors, consistent with specialists responding to lower earnings autocorrelation more efficiently than non-specialists.

Publication Title

Auditing

Volume

37

Issue

3

First Page

47

Last Page

69

Digital Object Identifier (DOI)

10.2308/ajpt-51820

ISSN

02780380

E-ISSN

15587991

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