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Association Between Discretionary Accruals and Audit Fees and the Role of the Size of the Audit Firm: European Evidence

Abstract

This study seeks to contribute to the analysis of discretionary accruals and audit fees in two pairs of European countries, Germany and France, and Italy and Spain, during the 2008–2009 financial crisis period, using a time-series and cross-sectional ordinary least squares method with interaction effects. For companies audited by Big 4 audit firms between 2005 and 2018, the study examined the relationship between the use of discretionary accruals and audit fees. This analysis included periods pre-, post-, and during the financial crisis, which started in 2008/2009 and lasted for the next five years, at least in most eurozone countries. The results confirm that Big 4 audit firms earn higher audit fees than non-Big 4 audit firms. Overall, they receive higher audit fees and encourage company management to engage in techniques designed to decrease or increase earnings. The type of earnings manipulation depends on the European country under consideration and whether the financial crisis affected the company. The implications for auditors and accountants are that they must advise the companies in these two pairs of countries differently as the financial crisis affected the second group of countries, Italy and Spain, to a greater extent than the first group, Germany and France.

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Fig. 1

Source: Authors’ calculations based on the Datastream database (Refinitiv, 2019)

Fig. 2

Source: Authors’ calculations based on the Datastream database (Refinitiv, 2019)

Notes

  1. 1.

    This study did not split this hypothesis into two sub-hypotheses for IFRS and non-IFRS companies as the companies were listed on domestic stock exchanges and apply IFRS standards. This study did not deal with companies that do not apply IFRS standards to their financial statement reports.

  2. 2.

    The same analysis was performed for all variables with and without scaling the lagged total assets. However, the t-tests showed no change in statistical significance.

  3. 3.

    The results were also tested with a dynamic time series and cross-sectional model that accounted for the lagged impact of discretionary accruals (DAC) on audit fees (AF), and did not seem to change overall. The results are available from the authors on request.

  4. 4.

    The only earnings management techniques taken into account were those considered through discretionary accruals. These included total assets, revenues, and property, plant and equipment costs via the Jones (1991) model.

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Correspondence to Maria I. Kyriakou.

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Kyriakou, M.I., Tsoktouridou, K. Association Between Discretionary Accruals and Audit Fees and the Role of the Size of the Audit Firm: European Evidence. Int Adv Econ Res (2021). https://doi.org/10.1007/s11294-021-09830-7

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Keywords

  • Big four audit firms
  • Non-Big four audit firms
  • Audit fees
  • Discretionary accruals

JEL

  • M41
  • M42