Premium
Investor legal protection, capitalized development costs, and audit fees: A cross‐country analysis
Author(s) -
Kuo NanTing,
Lee ChengFew
Publication year - 2018
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/jifm.12068
Subject(s) - audit , capitalization , business , discretion , accounting , earnings , affect (linguistics) , earnings management , finance , linguistics , philosophy , political science , law
Abstract Our study explores the association between capitalized development costs and audit fees. International Accounting Standard No. 38 stipulates the discretion to capitalize the development costs of internally generated intangible assets. We find a positive association between capitalized development costs and audit fees, which reflects auditors’ concern that managers may use the discretion of development cost capitalization to manipulate earnings. Moreover, this positive association is mitigated by stronger investor legal protection because stronger investor legal protection alleviates the earnings management concern from capitalized development costs. These results suggest that country‐level legal regimes affect auditors’ perception on client firms’ accounting choices. Our study contributes to the literature exploring how legal regimes affect auditor behaviors.