The Relation between Auditor's Fees and Fraudulent Financial Reporting

The purpose of this study is to examine the relationship between auditor's fees and a more direct measure of earnings management–fraudulent financial reporting. Using data collected from proxy statements and SEC’s Accounting and Auditing Enforcement Releases (AAERs), this study investigates the relationship between auditor's fees as measured for audit quality and detected earnings management as measured by fraudulent financial reporting. Contrary to the concerns of many in accounting practice and research, this study finds no statistically significant relationship between financial reporting fraud and fees paid to independent auditors for audit services and non-audit services, respectively, fees for all services combined, or fees for non-audit services relative to fees for audit services. This finding does not support the claim that non-audit fees paid to the auditor are the primary reason for auditor independence impairment that results in lower audit and earnings quality.