The Association between Abnormal Audit Fees and Audit Quality after IFRS Adoption in Korean Audit Service Market

Abstract

This study reexamines the relationship between abnormal audit fees and audit quality after International Financial Reporting Standards (IFRS) adoption. Using empirical data collected over the period from 2008 to 2013, this study finds that there exists no significant relationship between abnormal audit fees and audit quality measured by the magnitude of discretionary accruals in the pre-IFRS adoption period. However, the relationship between abnormal audit fees and the magnitude of discretionary accruals turns to be positive in the post-IFRS adoption period. These findings suggest the following two possible reasons. First, the IFRS enables some clients to engage more discretion in the choice of discretionary accruals and auditors charge higher fees in return for allowing the discretion for such clients. Second, auditors extend the scope of audit to mitigate the audit risk for clients who engage in extensive earnings management using discretionary accruals. As a result, audit fees increased for such clients.