Audit Opinion and Disclosure of Audit Fees

Dye (1991) suggests that when audit fees are disclosed, auditor independence will he improved because there are no quasi-rents to influence audit opinion and the public could assess the independence of the auditors. According to DeAngelo (1981a), however, disclosure of audit fees is irrelevant to the issuance of audit opinion because transaction costs, which give rise to quasi-rents, could not be affected by disclosure of audit fees. This paper examines this controversy by investigating the issuance of a going concern modified audit opinion before and after the disclosure requirement of the Securities and Exchange Commission (2000). The results show that financial statements issued after the disclosure requirement are more likely to be associated with a going concern opinion than those issued before the disclosure requirement. These results are robust to various sensitivity tests, including the control for the effect of economic factors, auditor reporting conservatism, and auditor reporting accuracy. In addition, it is found that firms before (after) the disclosure requirement are more (less) likely to receive a going concern opinion if audit fees were (were not) disclosed. Hence, this paper provides evidence to suggest that disclosure of audit fees is associated with enhanced auditor independence, and thus supports Dye's (1991) theory.

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