Fair Value Measurement and Audit Pricing

This study examines whether fair value reporting is related to audit pricing. I posit that the extent of assets and liabilities measured at fair value is positively associated with audit fees. When a client firm has a higher level of its assets and liabilities measured at fair values, its risk of financial misreporting is increased, making auditors increase their audit effort and, thereby, charge higher audit fees. Using firms covered in AuditAnalytics and Compustat database, I empirically examine an association between fair value estimates and audit fees. Consistent with my hypothesis, my findings indicate a positive relationship between the level of fair value assets and liabilities and audit fees. I also conduct several additional analyses which support the main findings. This paper contributes to the fair value literature and the audit pricing literature by offering direct empirical indication on the association between fair value reporting and audit fees. It further provides evidence on the economic consequences of SFAS 157 adoption and identifies the extent of assets and liabilities measured at fair value as one of the audit fee determinants.