Review of Quantitative Finance and Accounting

, Volume 27, Issue 3, pp 235–266 | Cite as

The joint determination of audit fees, non-audit fees, and abnormal accruals

  • Rick Antle
  • Elizabeth Gordon
  • Ganapathi Narayanamoorthy
  • Ling Zhou


Prior research has estimated piece-meal the determinants of audit fees, non-audit fees and abnormal accruals. Intuition, informal analysis, and a variety of theories suggest that audit fees, non-audit fees, and abnormal accruals are jointly determined. We address this endogeneity issue by modeling the confluence of audit fees, fees for non-audit services and abnormal accruals in a system of simultaneous equations.

Our joint estimation provides a starting point to look simultaneously at several competing theories. Using audit and non-audit fee data from the UK for 1994–2000, we find evidence consistent with knowledge spillovers (or economies of scope) from auditing to non-audit services and from non-audit services to auditing. While knowledge spillovers from non-audit services to auditing have been found in prior research [e.g. see Simunic, 1984], the presence of knowledge spillovers from auditing to non-audit services is a new result. Contrary to recent results in Ferguson et al. (2000) and Frankel et al. (2002), we do not find support for the assertion that fees for non-audit services increase abnormal accruals. In fact, contrary to the results in Ashbaugh et al. (2003) and Chung and Kallapur (2003), we find that non-audit fees decrease abnormal accruals, which we attribute to the productive effects of non-audit services. We also find evidence that audit fees increase abnormal accruals, consistent with behavioral theories of unconscious influence or bias in the auditor-client relation. The findings are robust to tests with US data.


Auditing Auditor independence Earnings management Abnormal accruals Economies of scope Endogeneity 


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Copyright information

© Springer Science + Business Media, LLC 2006

Authors and Affiliations

  • Rick Antle
    • 1
  • Elizabeth Gordon
    • 2
  • Ganapathi Narayanamoorthy
    • 3
  • Ling Zhou
    • 4
  1. 1.Yale School of ManagementNew Haven
  2. 2.Rutgers Business School, Newark & New Brunswick
  3. 3.Yale School of ManagementNew Haven
  4. 4.Tulane UniversityNew Orleans

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