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On accounting’s twenty-first century challenge: evidence on the relation between intangible assets and audit fees

  • Sudip Datta
  • Anand JhaEmail author
  • Manoj Kulchania
Original Research
  • 69 Downloads

Abstract

We inform the policy debate arising from the dramatic shift in US firms’ balance sheets towards intangible assets that has created a challenge for market participants to estimate firm value. While accounting guidelines have failed to keep pace with this change, the auditors’ perspective on this issue remains unknown. Our study reveals that auditors also find it relatively more challenging to audit firms with higher intangible assets. Specifically, we document a strong positive relation between audit fee and the proportion of intangible assets, after controlling for standard audit fee determinants. Further, we show that firms with higher proportion of intangible assets are associated with higher auditor effort and higher litigation risk for auditors, manifesting in higher audit fee. Ex post proxies of innovation success, such as patents, citation-weighted patents and ex ante R&D expense, indicate that firms with greater likelihood of innovation success are also charged higher audit fees. We find that high intangible asset firms in concentrated patent-generating industries (i.e. with lower expected patent litigation) are charged lower audit fees than similar firms in patent-competitive industries.

Keywords

Intangible assets Audit fees Intangible valuation Audit limitations Accounting policy and guidelines 

JEL classification

M41 M44 M49 

Notes

Acknowledgements

We thank Cheng-Few Lee (the editor), two anonymous referees, Mai Iskandar-Datta, Sudarshan Jayaraman, Cheol Lee, and Kannan Raghunandan for helpful comments and suggestions. We also thank Min-Jeong Kwon for useful research assistance. Any errors remain our own.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Mike Ilitch School of BusinessWayne State UniversityDetroitUSA

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