Fool’s Gold or Value for Money? The Link between Abnormal Audit Fees, Audit Firm Type, Fair Value Disclosures, and Market Valuation

International Journal of Auditing, Forthcoming

Posted: 25 Apr 2013 Last revised: 12 Jun 2023

See all articles by Ulf Mohrmann

Ulf Mohrmann

Norwegian School of Economics (NHH) - Department of Accounting, Auditing and Law

Jan Riepe

University of Tuebingen - Department of Banking

Ulrike Stefani

University of Konstanz - Department of Economics

Date Written: April 30, 2018

Abstract

We analyze whether the audit firm type and abnormal audit fees are associated with the market valuation of banks' fair‐value assets. Our results indicate that different auditor types use different strategies when auditing fair values. First, we show that Big 4 auditors restrict the Level 3 valuations to the most illiquid assets. Thus, those banks audited by a Big 4 auditor have a lower proportion of Level 3 assets. Second, the market discount on the Level 3 assets is higher for the banks audited by a Big 4 auditor than for those audited by a non‐Big 4 auditor. Third, the discount on the Level 3 portfolios of banks with non‐Big 4 auditors is higher if the unexpected audit fees are high. Thus, non‐Big 4 auditors seem to allow more high‐uncertainty valuations but charge a risk premium. We find similar effects for industry‐specialist auditors.

Keywords: Fair Value Accounting, Audit Fees, Audit Firm Size, Auditor Industry Specialization, Banks

JEL Classification: M41, M42, G21

Suggested Citation

Mohrmann, Ulf and Riepe, Jan and Stefani, Ulrike, Fool’s Gold or Value for Money? The Link between Abnormal Audit Fees, Audit Firm Type, Fair Value Disclosures, and Market Valuation (April 30, 2018). International Journal of Auditing, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2255486 or http://dx.doi.org/10.2139/ssrn.2255486

Ulf Mohrmann (Contact Author)

Norwegian School of Economics (NHH) - Department of Accounting, Auditing and Law ( email )

Helleveien 30
N-5045 Bergen
Norway

Jan Riepe

University of Tuebingen - Department of Banking ( email )

Nauklerstr. 47
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

Ulrike Stefani

University of Konstanz - Department of Economics ( email )

Konstanz, D-78457
Germany

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