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


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.


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

JEL classification

M41 M44 M49 



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.


  1. ACAP (2008) Final report of the advisory committee on the auditing profession to the US Department of the Treasury. Advisory Committee on the Auditing Profession, Washington, DCGoogle Scholar
  2. Altman EI (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J Finance 23:589–609CrossRefGoogle Scholar
  3. Amram M (2005) The challenge of valuing patents and early-state technologies. J Appl Corp Finance 17:68–81CrossRefGoogle Scholar
  4. Antle R, Gordon E, Narayanamoorthy G, Zhou L (2006) The joint determination of audit fees, non-audit fees, and abnormal accruals. Rev Quant Finance Account 27:235–266CrossRefGoogle Scholar
  5. Barth ME, Kasznik R, McNichols MF (2001) Analyst coverage and intangible assets. J Account Res 39:1–34CrossRefGoogle Scholar
  6. Bell TB, Landsman WR, Shackelford DA (2001) Auditors’ perceived business risk and audit fees: analysis and evidence. J Account Res 39:35–43CrossRefGoogle Scholar
  7. Bhattacharya S, Ritter JR (1983) Innovation and communication: signalling with partial disclosure. Rev Econ Stud 50:331–346CrossRefGoogle Scholar
  8. Blankley AI, Hurtt DN, MacGregor JE (2012) Abnormal audit fees and restatements. Audit J Pract Theory 31:79–96. CrossRefGoogle Scholar
  9. Bloom N, Schankerman M, Van Reenen J (2013) Identifying technology spillovers and product market rivalry. Econometrica 81:1347–1393CrossRefGoogle Scholar
  10. Cameran M, Perotti P (2014) Audit fees and IAS/IFRS adoption: evidence from the banking industry. Int J Audit 18:155–169CrossRefGoogle Scholar
  11. Causholli M, De Martinis M, Hay D, Knechel WR (2010) Audit markets, fees and production: towards an integrated view of empirical audit research. J Account Lit 29:167–215Google Scholar
  12. Chang H-L, Su C-W (2010) Is R&D always beneficial? Rev Pac Basin Financ Mark Policies 13:157–174CrossRefGoogle Scholar
  13. Chen C, Martin X, Wang X (2012) Insider trading, litigation concerns, and auditor going-concern opinions. Acc Rev 88:365–393CrossRefGoogle Scholar
  14. Cheng M, Dhaliwal D, Zhang Y (2013) Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting? J Acc Econ 56:1–18CrossRefGoogle Scholar
  15. Cohen L, Diether K, Malloy C (2013) Misvaluing innovation. Rev Financ Stud 26:635–666CrossRefGoogle Scholar
  16. Copeland T, Antikarov V (2003) Real options: a practitioners guide. Cengage Learning, New YorkGoogle Scholar
  17. Corrado CA, Hulten CR (2010) How do you measure a “technological revolution”? Am Econ Rev 100:99–104CrossRefGoogle Scholar
  18. Corrado C, Hulten C, Sichel D (2009) Intangible capital and US economic growth. Rev Income Wealth 55:661–685CrossRefGoogle Scholar
  19. Douglas AV, Huang AG, Vetzal KR (2016) Cash flow volatility and corporate bond yield spreads. Rev Quant Finance Account 46:417–458CrossRefGoogle Scholar
  20. Dye RA (1993) Auditing standards, legal liability, and auditor wealth. J Political Econ 101:887–914CrossRefGoogle Scholar
  21. Edmans A (2011) Does the stock market fully value intangibles? Employee satisfaction and equity prices. J Financ Econ 101:621–640CrossRefGoogle Scholar
  22. Ettredge ML, Li C, Sun L (2006) The impact of SOX section 404 internal control quality assessment on audit delay in the SOX era. Audit J Pract Theory 25:1–23CrossRefGoogle Scholar
  23. Falato A, Kadyrzhanova D, Sim J (2013) Rising intangible capital, shrinking debt capacity, and the US corporate savings glut. Accessed 1 June 2017
  24. Fields LP, Fraser DR, Wilkins MS (2004) An investigation of the pricing of audit services for financial institutions. J Account Public Policy 23:53–77CrossRefGoogle Scholar
  25. Fung SYK, Gul FA, Krishnan J (2012) City-level auditor industry specialization, economies of scale, and audit pricing. Account Rev 87:1281–1307. CrossRefGoogle Scholar
  26. Gu F, Wang W (2005) Intangible assets, information complexity, and analysts’ earnings forecasts. J Bus Finance Account 32:1673–1702CrossRefGoogle Scholar
  27. Gul FA, Chen CJP, Tsui JSL (2003) Discretionary accounting accruals, managers’ incentives, and audit fees. Contemp Account Res 20:441–464CrossRefGoogle Scholar
  28. Hall BH, Jaffe A, Trajtenberg M (2005) Market value and patent citations. RAND J Econ 36:16–38Google Scholar
  29. Hay DC, Knechel WR, Wong N (2006) Audit fees: a meta-analysis of the effect of supply and demand attributes. Contemp Account Res 23:141–191CrossRefGoogle Scholar
  30. Heckman JJ, Ichimura H, Todd PE (1997) Matching as an econometric evaluation estimator: evidence from evaluating a job training programme. Rev Econ Stud 64:605–654CrossRefGoogle Scholar
  31. Holmstrom B (1989) Agency costs and innovation. J Econ Behav Organ 12:305–327CrossRefGoogle Scholar
  32. Hope O-K, Langli JC, Thomas WB (2012) Agency conflicts and auditing in private firms. Account Organ Soc 37:500–517CrossRefGoogle Scholar
  33. Hwang Y-S, Min H-G, Han S-H (2010) The influence of financial development on R&D activity: cross-country evidence. Rev Pac Basin Financ Mark Policies 13:381–401CrossRefGoogle Scholar
  34. Jha A, Chen Y (2015) Audit fees and social capital. Account Rev 90:611–639. CrossRefGoogle Scholar
  35. Kline DJ (2004) Patent litigation: the sport of kings. MIT Technology Review.
  36. Knechel WR, Payne JL (2001) Additional evidence on audit report lag. Audit J Pract Theory 20:137–146CrossRefGoogle Scholar
  37. Kogan L, Papanikolaou D, Seru A, Stoffman N (2017) Technological innovation, resource allocation, and growth. Q J Econ 132:665–712CrossRefGoogle Scholar
  38. Krishnan J, Krishnan J (1997) Litigation risk and auditor resignations. Account Rev 72:539–560Google Scholar
  39. Lanjouw JO, Schankerman M (1997) Stylized facts of patent litigation: value, scope and ownership. National Bureau of Economic Research. Accessed 10 Apr 2017
  40. Lev B (2004) Sharpening the intangibles edge. Harvard Bus Rev 6:109–116Google Scholar
  41. Lev B, Gu F (2016) The end of accounting and the path forward for investors and managers. Wiley, HabokenCrossRefGoogle Scholar
  42. Lev B, Zarowin P (1999) The boundaries of financial reporting and how to extend them. J Account Res 37:353–385CrossRefGoogle Scholar
  43. Makrominas M (2017) Recognized intangibles and the present value of growth options. Rev Quant Finance Account 48:311–329CrossRefGoogle Scholar
  44. Mitra S, Jaggi B, Al-Hayale T (2019) Managerial overconfidence, ability, firm-governance and audit fees. Rev Quant Finance Account 52:841–870CrossRefGoogle Scholar
  45. Mun J (2002) Real options analysis: tools and techniques for valuing strategic investments and decisions, vol 137. Wiley, New YorkGoogle Scholar
  46. Newton NJ, Wang D, Wilkins MS (2013) Does a lack of choice lead to lower quality? Evidence from auditor competition and client restatements. Audit A J Practice Theory 32:31–67CrossRefGoogle Scholar
  47. Pástor Ľ, Veronesi P (2009) Technological revolutions and stock prices. Am Econ Rev 99:1451–1483CrossRefGoogle Scholar
  48. Peters RH, Taylor LA (2017) Intangible capital and the investment-q relation. J Financ Econ 123:251–272CrossRefGoogle Scholar
  49. Roychowdhury S (2006) Earnings management through real activities manipulation. J Account Econ 42:335–370CrossRefGoogle Scholar
  50. Schumpeter JA (1934) The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle, vol 55. Transaction Publishers, PiscatawayGoogle Scholar
  51. Shu SZ (2000) Auditor resignations: clientele effects and legal liability. J Account Econ 29:173–205CrossRefGoogle Scholar
  52. Simunic DA (1980) The pricing of audit services: theory and evidence. J Account Res 18:161–190CrossRefGoogle Scholar
  53. Skinner DJ (2008) Accounting for intangibles—a critical review of policy recommendations. Account Bus Res 38:191–204CrossRefGoogle Scholar
  54. Solow RM (1956) A contribution to the theory of economic growth. Q J Econ 70:65–94CrossRefGoogle Scholar
  55. Upton W (2001) Special report: business and financial reporting, challenges from the new economy (No. 219-A). Financial Accounting Standards Board (FASB), ConnecticutGoogle Scholar
  56. Vafeas N, Waegelein JF (2007) The association between audit committees, compensation incentives, and corporate audit fees. Rev Quant Finance Account 28:241–255CrossRefGoogle Scholar
  57. Williamson OE (1983) Credible commitments: using hostages to support exchange. Am Econ Rev 73:519–540Google Scholar
  58. Wyatt A (2005) Accounting recognition of intangible assets: theory and evidence on economic determinants. Account Rev 80:967–1003CrossRefGoogle Scholar
  59. Ziedonis RH (2004) Don’t fence me in: fragmented markets for technology and the patent acquisition strategies of firms. Manag Sci 50:804–820CrossRefGoogle Scholar

Copyright information

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

Authors and Affiliations

  1. 1.Mike Ilitch School of BusinessWayne State UniversityDetroitUSA

Personalised recommendations