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Impact of Audit Fees on Earnings Management and Financial Risk: An Analysis of Corporate Finance Practices

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  • Abbas Ali Daryaei

    (Department of Accounting, Imam Khomeini International University, Qazvin 34148-96818, Iran)

  • Davood Askarany

    (Department of Accounting & Finance, Business School, The University of Auckland, Auckland 1010, New Zealand)

  • Yasin Fattahi

    (Department of Accounting, Imam Khomeini International University, Qazvin 34148-96818, Iran)

Abstract

This study employs a robust quantitative ex post facto research design to investigate the complex relationship between audit fees and earnings management. The financial information of 164 firms admitted to the Tehran Stock Exchange (TSE) was used from 2010 to 2019 (pre-COVID period) to achieve the research goal. Analysing data from the Tehran Stock Exchange firms, the study uncovers an inverted U-shaped relationship between audit fees and earnings management. This suggests that moderate audit fees can lead to higher earnings management. Key contributions of this paper include highlighting the role of audit fees in influencing financial reporting quality and risk management, providing empirical evidence on the asymmetric effects of normal and abnormal audit fees on earnings management, and emphasising the need for balanced audit fee structures to ensure financial transparency and mitigate risk. The findings offer valuable insights for academics, practitioners, and policymakers in understanding the nuances of audit fees and their impact on corporate financial practices. This study advances the literature on financial risk management and corporate finance. It emphasises the importance of balanced audit fee structures for management teams, auditors, and policymakers to ensure transparent financial reporting practices.

Suggested Citation

  • Abbas Ali Daryaei & Davood Askarany & Yasin Fattahi, 2024. "Impact of Audit Fees on Earnings Management and Financial Risk: An Analysis of Corporate Finance Practices," Risks, MDPI, vol. 12(8), pages 1-22, August.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:8:p:123-:d:1449107
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    References listed on IDEAS

    as
    1. Simunic, Da, 1980. "The Pricing Of Audit Services - Theory And Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 161-190.
    2. Mohsen Tavakoli Shandiz & Farzaneh Nassir Zadeh & Davood Askarany, 2022. "The Interactive Effect of Ownership Structure on the Relationship between Annual Board Report Readability and Stock Price Crash Risk," JRFM, MDPI, vol. 15(6), pages 1-17, June.
    3. Rick Antle & Elizabeth Gordon & Ganapathi Narayanamoorthy & Ling Zhou, 2002. "The Joint Determination of Audit Fees, Non-Audit Fees, and Abnormal Accruals," Yale School of Management Working Papers amz2502, Yale School of Management, revised 02 May 2006.
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