Accounting News

Tuesday, September 27, 2011
Audit Costs Portend Financial Results

Jonathan D. Stanley of Auburn University had a great theory. Is the cost of a financial audit for a public company related to its financial performance? To test it out he did a study of the audit fees paid by public companies and then tracked their financial performance. The results are in the current issue Auditing: A Journal of Practice & Theory.

The answer to his question was yes. His study showed that as audit fees rose the performance of the company declined. It could be seen up to five years out. The other interesting aspect is rising fees were a stronger indicator of poor performance than falling fees portended rising performance.

While checking auditing fees against similar companies is not the only thing an investor should check it is another tool they can use.