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Is There A Relation Between Abnormal Bank Loan Loss Provisions And Auditor Fees?
Kiridaran Kanagaretnam, McMaster University
Gopal Krishnan, George Mason University
Gerald Lobo, University of Houston
ABSTRACT. While the SEC, investors, analysts, and the media have expressed concern that the joint provision of audit and nonaudit services by the incumbent auditor poses a threat to the auditor’s independence, prior research has not documented a systematic relation between earnings management and fees paid to the auditor. A major issue in prior research is that the estimate of abnormal total accruals used as a proxy for earnings management is subject to severe measurement error. To reduce measurement error and conduct more powerful tests, we examine the association between bank loan loss provisions, a major accrual for banks and fees paid to the auditor. By focusing on a single industry and a single accrual, we are better able to estimate the abnormal accrual. We document that abnormal loan loss provisions are associated with fees paid to the auditor. Our findings are robust across several measures of auditor fees, including abnormal (unexpected) fees.
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