University of Cincinnati Lindner College of Business

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Is There a Relation Between Residual Audit Fees and Analysts ’ Forecasts ?

Author(s): John Abernathy, Tony Kang, Gopal Krishnan, Changjiang Wang

Status: Accepted
Year: 2016
Publication Name: Journal of Accounting, Auditing & Finance, Page Number(s): 1–25


Abstract

We examine the relationship between residual audit fees and the ability to predict future earnings. Recent research suggests that residual audit fees contain information about accounting quality. However, residual audit fees could either represent high accounting qual- ity or a risk premium for low accounting quality.We extend this literature by providing evi- dence that residual audit fees are indicative of a lower quality information environment which has a negative impact on investors’ ability to anticipate future earnings. Specifically, we first show that residual audit fees are negatively associated with the ability of current earnings to predict future earnings. Furthermore, residual audit fees are negatively associ- ated with analyst forecast accuracy and positively associated with the dispersion in analyst forecasts. Overall, our results are consistent with the notion that residual audit fees are indicative of poor earnings quality, and that this lower quality manifests itself in a lower quality information environment for investors and analysts


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