Abnormal Fees and Timely Loss Recognition—A Long-Term Perspective

Abstract

SUMMARY We examine the relation between timely loss recognition and abnormal audit, non-audit, and total fees over a period of thirteen years. We use positive abnormal audit (non-audit) fees as a measure of abnormal audit effort (economic bond). We report some evidence suggesting audit effort is associated with slower loss recognition in accruals before the Sarbanes-Oxley Act (SOX) became effective. We find stronger evidence that audit effort is associated with slower loss recognition post-SOX when clients raise substantial external funds or when the auditor is not an industry specialist. Using C_Score, we find a negative association between changes in abnormal audit fees and total fees, and changes in C_Score only post-SOX. We do not find abnormal non-audit fees are associated with the speed of loss recognition. Collectively, the results suggest post-SOX auditors exert more effort when losses are delayed and that non-audit services do not compromise auditor independence.