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Auditors' Perceived Business Risk and Audit Fees: Analysis and Evidence
Author(s) -
Bell Timothy B.,
Landsman Wayne R.,
Shackelford Douglas A.
Publication year - 2001
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.00002
Subject(s) - audit , business , accounting , business risks , audit risk , joint audit , audit evidence , confidentiality , audit plan , actuarial science , finance , internal audit , risk analysis (engineering) , law , political science
This study analyzes the relation between auditors' perceived business risk and audit fees to determine whether audit firms or their clients bear the expected legal costs of business risk. We predict that hourly audit fees and the number of audit hours are increasing in business risk. Using confidential survey data collected by a large international accounting firm for 422 audits, we find that high business risk increases the number of audit hours, but not the fee per hour. This implies that firms perceive firm‐level differences in business risk and obtain compensation through billing additional hours, not by raising the hourly charge.