Audit fees and earnings management: differences based on the type of audit

Figures & data

Table 1. Sample distribution.

Panel A: Sample distribution by audit status
Year	Voluntary audits		Mandatory audits		Total
2009	223	5.87%	3,575	94.13%	3,798
2010	345	9.41%	3,321	90.59%	3,666
2011	415	10.50%	3,536	89.50%	3,951
2012	397	10.39%	3,425	89.61%	3,822
2013	406	11.91%	3,003	88.09%	3,409
2014	353	12.72%	2,422	87.28%	2,775
2015	262	10.26%	2,292	89.74%	2,554
2016	290	9.30%	2,829	90.70%	3,119
2017	221	8.94%	2,252	91.06%	2,473
2018	113	11.52%	868	88.48%	981
Total	3,025	9.90%	27,523	90.10%	30,548
Panel B: Sample distribution by auditor choice
Year	Small	M-Tier	Big	Total
2009	3,436	157	205	3,798
2010	3,295	162	209	3,666
2011	3,578	122	251	3,951
2012	3,440	124	258	3,822
2013	3,048	111	250	3,409
2014	2,513	84	178	2,775
2015	2,311	69	174	2,554
2016	2,805	85	229	3,119
2017	2,256	61	156	2,473
2018	890	26	65	981
Total	27,572	2,976	1 ,975	30,548
Voluntary Audits	2,556 (84.50%)	158 (5.22%)	311 (10.28%)	3,025 (100%)
Mandatory Audits	25,016 (90.89%)	843 (3.06%)	1,664 (6.05%)	27,523 (100%)
Total	27,572 (90.26%)	1,001 (9.74%)	1,975 (6.47%)	30,548 (100%)

Table 2. Descriptive statistics.

Panel A: Distributional properties (30,548 observations)
	Mean	Std. Dev.	1%	25%	50%	75%	99%
+/− DA	−0.0011	0.1024	−0.2695	−0.0584	−0.0021	0.0545	0.2817
|DA|	0.0763	0.0683	0.0010	0.0259	0.0565	0.1062	0.3112
LNFEES	1.9966	0.3667	1.1762	1.7579	1.9741	2.2194	2.9837
AB_LNFEES	−0.0029	0.3155	−0.7108	−0.2181	−0.0099	0.2126	0.7369
LNASS	8.8437	0.5864	7.5679	8.4547	8.8042	9.1770	10.6113
ROBA	0.0646	0.0838	−0.1897	0.0264	0.0557	0.0975	0.3351
N_EARN	0.1591	0.3658	0.0000	0.0000	0.0000	0.0000	1.0000
LEV	0.2775	0.1859	0.0058	0.1218	0.2558	0.4073	0.7499
LIQ	1.8506	1.4302	0.3994	1.1068	1.4324	2.0757	7.9167
GROWTH	0.0128	0.2030	−0.4807	−0.0930	0.0096	0.1072	0.6580
AGE	24.0796	11.0563	5.0000	16.0000	23.0000	30.0000	58.0000
Panel B: Mean and standard deviation of variables by audit status
	Voluntary Audit (3,025 observations)		Mandatory Audit (27,523 observations)		Test for mean differences
Variable	Mean	Std. Dev.	Mean	Std. Dev.	Diff	t
+/− DA	−0.0078	0.1011	−0.0004	0.1025	−0.0074	−3.79***
|DA|	0.0750	0.0682	0.0765	0.0683	−0.0015	−1.14***
LNFEES	1.8459	0.3739	2.0131	0.3620	−0.1673	−24.04***
AB_LNFEES	−0.0241	0.3223	−0.0004	0.3146	−0.0237	−3.72***
LNASS	8.4887	0.7782	8.8827	0.5475	−0.3939	−35.80***
ROBA	0.0414	0.0930	0.0672	0.0823	−0.0258	−16.14***
N_EARN	0.2572	0.4372	0.1483	0.3555	0.1088	15.59***
LEV	0.2663	0.1905	0.2788	0.1853	−0.0125	−3.51***
LIQ	2.1049	1.9545	1.8226	1.3575	0.2823	10.32***
GROWTH	0.0246	0.2284	0.0115	0.2000	0.0131	3.38***
AGE	24.6079	11.3148	24.0215	11.0262	0.5865	2.77***

***, ** and * denote coefficients’ statistical significance at the 1%, 5% and 10% confidence level, respectively.

Table 3. Correlation matrix.

	+/−DA	|DA|	LNFEES	AB_LNFEES	LNASS	ROBA	N_EARN	LEV	LIQ	GROWTH	AGE
+/−DA	1.000
|DA|	0.024	1.000
LNFEES	−0.018	−0.001	1.000
AB_LNFEES	−0.013	−0.017	0.875	1.000
LNASS	0.071	−0.024	0.229	−0.020	1.000
ROBA	0.135	0.029	−0.019	−0.015	0.052	1.000
N_EARN	−0.133	0.048	0.037	−0.003	−0.097	−0.544	1.000
LEV	0.069	0.067	−0.024	−0.023	0.096	−0.207	0.131	1.000
LIQ	0.050	−0.016	0.025	0.001	0.154	0.025	−0.050	−0.343	1.000
GROWTH	0.017	0.011	−0.007	−0.058	0.144	0.243	−0.210	−0.006	−0.068	1.000
AGE	−0.018	−0.077	0.090	0.009	0.074	−0.119	0.040	−0.109	0.120	0.003	1.000

Coefficients in bold denote statistical significance at the 5% level.

Table 4. Fixed-effects regression results.

	|DA|		−DA		+DA
	Coef.	t	Coef.	t	Coef.	t
VOL	−0.0176	−1.73*	−0.0120	−0.69	−0.0480	−2.47**
LNFEES	−0.0063	−1.83*	0.0026	0.51	−0.0115	−2.02**
INTER	0.0093	1.75*	0.0078	0.85	0.0259	2.50**
LARGE	−0.0042	−0.84	0.0128	1.83*	0.0045	0.53
BIG	0.0054	0.88	−0.0120	−1.36	−0.0035	−0.33
LNASS	0.0038	1.67*	0.0117	3.40***	0.0179	4.88***
ROBA	0.0245	3.07*	0.0676	5.70***	0.1545	11.45***
N_EARN	0.0106	6.58***	−0.0127	−5.55***	0.0041	1.44
LEV	0.0291	5.44***	0.0905	11.27***	0.1426	16.20***
LIQ	0.0001	0.22	0.0053	4.71***	0.0054	5.48***
GROWTH	0.0040	1.69*	−0.0107	−2.99***	−0.0102	−2.63***
AGE	−0.0014	−4.34***	0.0020	4.38***	−0.0015	−2.82***
Intercept	0.0780	3.89***	−0.2711	−8.84***	−0.0883	−2.80***
N	30,548		15,558		14,985
F	70.9		14.77		22.66
R-Within	0.60%		2.99%		4.72%

Table reports the FE regression results of the following model: ${EM}_{it}=\alpha +{\beta }_1{\mathit{VOL}}_{it}+{\beta }_2{\mathit{LNFEES}}_{it}+{\beta }_3{\mathit{INTER}}_{it}+\gamma \mathit{CONTROL}+.$${\epsilon }_{it}$

EM is proxied by the absolute value of discretionary accruals (|DA|) and the signed accruals (+/− DA).

***, ** and * denote the coefficient’s statistical significance at the 1%, 5% and 10% confidence level, respectively.

Coefficients of year dummies are not included for parsimony.

Table 5. Voluntary vs Mandatory setting.

	|DA|		+DA		−DA
	Coef.	t	Coef.	t	Coef.	t
Panel A: Voluntary audits
LNFEES	0.0033	0.25	0.0118	0.60	0.0217	0.90
LARGE	−0.0203	−1.35	0.0746	2.91***	−0.0133	−0.55
BIG	0.0327	1.41	−0.1125	−2.82***	−0.0012	−0.04
LNASS	0.0051	0.48	−0.0196	−1.23	0.0133	0.66
ROBA	0.0006	0.02	0.0409	1.10	0.0829	1.48
N_EARN	0.0084	1.62	−0.0082	−1.13	0.0097	0.96
LEV	0.0463	2.26**	0.0289	0.91	0.1448	3.82***
LIQ	0.0021	1.38	−0.0002	−0.05	0.0020	0.79
GROWTH	−0.0021	−0.28	−0.0012	−0.11	−0.0094	−0.60
AGE	−0.0012	−0.90	0.0000	0.00	−0.0051	−2.00**
Intercept	0.0384	0.40	0.0560	0.39	−0.0100	−0.05
N	3,025		1,604		1,421
F	1.64		1.24		1.66
R-Within	1.75%		3.38%		5.45%
Panel B: Mandatory audits
	|DA|		+DA		−DA
	Coef.	t	Coef.	t	Coef.	t
LNFEES	−0.0070	−1.90*	0.0051	0.92	−0.0118	−1.95*
LARGE	−0.0027	−0.48	0.0084	1.10	0.0013	0.14
BIG	0,.0027	0.40	−0.0053	−0.56	−0.0005	−0.05
LNASS	0.0051	2.10**	0.0134	3.68***	0.0209	5.38***
ROBA	0.0291	3.38***	0.0676	5.26***	0.1610	11.12***
N_EARN	0.0107	6.14***	−0.0144	−5.80***	0.0027	0.90
LEV	0.0279	4.87***	0.0968	11.31***	0.1453	15.32***
LIQ	−0.0004	−0.47	0.0059	4.78***	0.0061	5.54***
GROWTH	0.0034	1.34	−0.0123	−3.17***	−0.0129	−3.14***
AGE	−0.0014	−4.17***	0.0020	4.08***	−0.0016	−2.93***
Intercept	0.0693	3.26***	−0.2938	−9.00***	−0.1134	−3.40***
N	27,523		13,954		13,564
F	7.10		16.25		23.22
R-Within	0.60%		3.32%		4.81%

Table reports the FE regression results of the following model: ${EM}_{it}=\alpha +{\beta }_1{\mathit{LNFEES}}_{it}+\gamma \mathit{CONTROL}+.$${\epsilon }_{it}$

EM is proxied by the absolute value of discretionary accruals (|DA|) and the signed accruals (+/- DA).

Panel A shows the results for the sub-sample of voluntary audits.

Panel B shows the results for the sub-sample of mandatory audits.

***, ** and * denote the coefficient’s statistical significance at the 1%, 5% and 10% confidence level, respectively.

Coefficients of year dummies are not included for parsimony.

Table 6. Regression results with abnormal fees.

	|DA|		−DA		+DA
	Coef.	t	Coef.	t	Coef.	t
VOL	−0.0015	−0.53	0.0019	0.47	−0.0043	−0.93
AB_LNFEES	−0.0119	−2.88***	0.0105	1.69*	−0.0144	−2.15**
INTER_AB	0.0178	2.30**	−0.0064	−0.55	0.0313	2.41**
LARGE	−0.0076	−1.29	0.0164	1.91*	−0.0010	−0.10
BIG	0.0042	0.60	−0.0068	−0.65	−0.0053	−0.45
LNASS	0.0042	1.66*	0.0116	2.98***	0.0178	4.40***
ROBA	0.0257	2.91***	0.0686	5.22***	0.1502	9.97***
N_EARN	0.0092	5.14***	−0.0137	−5.30***	0.0007	0.24
LEV	0.0259	4.29***	0.1067	11.61***	0.1438	14.46***
LIQ	0.0001	0.09	0.0065	4.91***	0.0062	5.58***
GROWTH	0.0063	2.47**	−0.0164	−4.14***	−0.0110	−2.63***
AGE	−0.0007	−1.88*	0.0011	1.99**	−0.0015	−2.55**
Intercept	0.0454	2.04**	−0.2477	−7.16***	−0.1099	−3.15***
N	26,328		13,259		13,064
F	5,09		14.17		19.94
R-Within	0.48%		3.34%		4.67%

Table reports the FE regression results of the following model: ${EM}_{it}=\alpha +{\beta }_1{\mathit{VOL}}_{it}+{\beta }_{2}AB\_{\mathit{LNFEES}}_{it}+{\beta }_3{\mathit{INTER}\_AB}_{it}+\gamma \mathit{CONTROL}+.$${\epsilon }_{it}$

EM is proxied by the absolute value of discretionary accruals (|DA|) and the signed accruals (+/− DA).

***, ** and * denote the coefficient’s statistical significance at the 1%, 5% and 10% confidence level, respectively.

Coefficients of year dummies are not included for parsimony.

Table 7. Alternative measures.

Panel A: Modified Jones Model
	|DA|		−DA		+DA
	Coef.	t	Coef.	t	Coef.	t
VOL	−0.0203	−1.75*	−0.0028	−0.16	−0.0500	−2.48**
LNFEES	−0.0055	−1.68*	−0.0009	−0.17	−0.0101	−1.79*
INTER	0.0110	1.82*	0.0011	0.13	0.0267	2.50**
LARGE_A	−0.0050	−0.99	0.0137	1.93**	0.0025	0.30
BIG	0.0050	0.81	−0.0076	−0.85	0.0001	0.01
LNASS	0.0038	1.69*	0.0124	3.58***	0.0212	5.76***
ROBA	0.0212	2.64***	0.0789	6.55***	0.1493	11.09***
N_EARN	0.0125	7.68***	−0.0122	−5.33***	0.0057	1.97**
LEV	0.0326	6.05***	0.0833	10.32***	0.1454	16.44***
LIQ	−0.0003	−0.48	0.0061	5.51***	0.0060	6.00***
GROWTH	0.0050	2.13**	0.0106	2.90***	0.0130	3.43***
AGE	−0.0013	−4.06***	0.0014	2.95***	−0.0019	−3.59***
Intercept	0.0739	3.67***	−0.2541	−8.18***	−0.1114	−3.54***
N	30,505		15,532		14,968
F	8.44		16.63		25.11
R-Within	0.71%		3.37%		5.18%
Panel B: Short-term Jones Model
	|DA|		−DA		+DA
	Coef.	t	Coef.	t	Coef.	t
VOL	−0.0193	−1.70*	0.0055	0.33	−0.0471	−2.42**
LNFEES	−0.0045	−1.30	−0.0077	−1.48	−0.0134	−2.39**
INTER	0.0103	1.74*	−0.0026	−0.30	0.0245	2.38**
LARGE_A	−0.0037	−0.75	0.0132	1.85*	0.0039	0.47
BIG	0.0060	0.99	−0.0207	−2.28**	−0.0042	−0.42
LNASS	0.0046	2.05**	0.0118	3.44***	0.0147	4.09***
ROBA	0.0287	3.63***	0.0722	6.01***	0.1386	10.51***
N_EARN	0.0102	6.43***	−0.0105	−4.66***	0.0025	0.88
LEV	0.0371	7.01***	0.0767	9.59***	0.1389	15.94***
LIQ	0.0007	1.13	0.0054	4.82***	0.0056	5.76***
GROWTH	0.0033	1.42	−0.0128	−3.65***	−0.0114	−2.97***
AGE	−0.0014	−4.58***	0.0026	5.70***	−0.0011	−2.18**
Intercept	0.0637	3.22***	−0.2590	−8.42***	−0.0615	−1.97**
N	30,529		15,219		15,310
F	8.93		14.21		20.88
R-Within	0.75%		3.01%		4.23%

Panel A reports the FE regression of Model (1) using the Modified Jones Model as the proxy for EM.

Panel B reports the FE regression of Model (1) using the Short-term Jones Model as the proxy for EM.

***, ** and * denote the coefficient’s statistical significance at the 1%, 5% and 10% confidence level, respectively.

Coefficients of year dummies are not included for parsimony.

Table 8. Alternative measures – Abnormal fees.

Panel A: Modified Jones Model
	|DA|		−DA		+DA
	Coef.	t	Coef.	t	Coef.	t
VOL	−0.0009	−0.33	−0.0006	−0.16	−0.0042	−0.89
AB_LNFEES	−0.0124	−2.98***	0.0105	1.70*	−0.0170	−2.53**
INTER_AB	0.0186	2.38**	−0.0136	−1.20	0.0332	2.46**
LARGE_A	−0.0090	−1.51	0.0128	1.45	−0.0015	−0.15
BIG	0.0048	0.68	0.0026	0.24	−0.0016	−0.14
LNASS	0.0042	1.66*	0.0119	3.03***	0.0219	5.38***
ROBA	0.0219	2.46**	0.0794	5.93***	0.1460	9.73***
N_EARN	0.0112	6.18***	−0.0134	−5.20***	0.0030	0.94
LEV	0.0309	5.10***	0.0969	10.47***	0.1479	14.84***
LIQ	−0.0004	−0.49	0.0065	5.10***	0.0070	6.20***
GROWTH	0.0084	3.26***	0.0057	1.40	0.0138	3.38***
AGE	−0.0006	−1.60	0.0008	1.51	−0.0016	−2.69***
Intercept	0.0423	1.89*	−0.2427	−6.94***	−0.1463	−4.21***
N	26,308		13,215		13,088
F	6.54		14.31		22.89
R-Within	0.62%		3.40%		5.28%
Panel B: Short-term Jones Model
	|DA|		−DA		+DA
	Coef.	t	Coef.	t	Coef.	t
VOL	−0.0006	−0.21	−0.0012	−0.28	−0.0060	−1.21
AB_LNFEES	−0.0076	−1.87*	0.0055	0.86	−0.0184	−2.59**
INTER_AB	0.0156	2.04**	−0.0071	−0.60	0.0461	3.22***
LARGE_A	−0.0038	−0.64	0.0117	1.28	0.0026	0.25
BIG	0.0037	0.53	0.0023	0.21	−0.0026	−0.22
LNASS	0.0057	2.29**	0.0073	1.78*	0.0194	4.51***
ROBA	0.0313	3.60***	0.0703	5.07***	0.1370	8.59***
N_EARN	0.0093	5.23***	−0.0127	−4.78***	0.0005	0.15
LEV	0.0383	6.43***	0.0973	10.15***	0.1517	14.32***
LIQ	0.0006	0.85	0.0073	5.54***	0.0074	6.22***
GROWTH	0.0047	1.87*	−0.0539	−12.83***	−0.0546	−12.56***
AGE	−0.0006	−1.66*	0.0011	1.91*	−0.0016	−2.48**
Intercept	0.0232	1.05	−0.1956	−5.39***	−0.1246	−3.38***
N	26,316		13,213		13,098
F	6.41		21.14		26.01
R-Within	0.61%		4.94%		5.95%

Panel A reports the FE regression of Model (2) using the Modified Jones Model as the proxy for EM.

Panel B reports the FE regression of Model (2) using the Short-term Jones Model as the proxy for EM.

***, ** and * denote the coefficient’s statistical significance at the 1%, 5% and 10% confidence level, respectively.

Coefficients of year dummies are not included for parsimony.

Table

Variable name	Description
Models (1) and (2)
Dependent variable
EM	Earnings management measure
|DA|	Absolute discretionary accruals
+/− DA	Signed discretionary accruals
Test variables
VOL	Dummy = 1 if company is voluntarily audited, 0 otherwise
LNFEES	Natural logarithm of audit fees
INTER	Interaction term between VOL and LNFEES
AB_LNFEES	Abnormal audit fees, calculated according to Model (3)
INTER_AB	Interaction term between VOL and AB_LNFEES
Control variables
LARGE	Dummy = 1 if company is audited by a Big 4 or a Middle-Tier auditor, 0 otherwise
BIG	Dummy = 1 if company is audited by a Big 4 auditor, 0 otherwise
LNASS	Natural logarithm of total assets
ROBA	Return on Business Assets
N_EARN	Dummy = 1 if earnings are negative, 0 otherwise
LEV	Leverage ratio
LIQ	Liquidity ratio
GROWTH	Growth, measured as the growth in sales
AGE	Age of the company

Table

Variable name	Description
Dependent variable
LNFEES	Natural logarithm of audit fees
Test variables
LARGE	Dummy = 1 if company is audited by a Big 4 or a Middle-Tier auditor, 0 otherwise
BIG	Dummy = 1 if company is audited by a Big 4 auditor, 0 otherwise
LNASS	Natural logarithm of total assets
LNSAL	Natural logarithm of net turnover
LNEMP	Natural logarithm of number of employees
INVREC	Ratio of inventory and receivables to total assets
ACQ	Dummy = 1 if company has carried out acquisitions
INT_ASS	Proportion of intangible assets
UNUS	Dummy = 1 if company reports unusual items in the income statement
SIMP_GAAP	Dummy = 1 if company uses simplified GAAP
NUM_SUBS	Number of subsidiaries
GROUP	Dummy = 1 for companies belonging to a group
LEV	Leverage ratio
CH_LEV	Changes in leverage between t and t-1
GROWTH	Company growth (growth in sales)
ROBA	Return on Business Assets
NEG_EARN	Dummy = 1 if earnings are negative, 0 otherwise
NEG_ROBA	Interaction term between ROBA and NEG_EARN
CURRENT	Ratio of current assets to current liabilities
QUICK	Ratio of current assets excluding inventories to current liabilities
SOLV	Ratio of share capital to total assets
CH_SOLV	Changes in solvency between t and t-1
MOD	Dummy = 1 if modified audit report, 0 otherwise
YEAR_END	Dummy = 1 if year-end on 31 December
C_CITY	Dummy = 1 if company is located in Madrid or Barcelona
AGE	Age of the company