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The Differential Effects of Auditors' Nonaudit and Audit Fees on Accrual Quality *

The Differential Effects of Auditors' Nonaudit and Audit Fees on Accrual Quality * Contemporary Accounting Research Vol. 24 No. 2 (Summer 2007) pp. 595–629 © CAAA Contemporary Accounting Research separated out from total accruals (see, for example, Guay, Kothari, and Watts 1996; Bernard and Skinner 1996). Francis, LaFond, Olsson, and Schipper (2005) also argue1 that the modified Jones (Dechow, Sloan, and Sweeney 1995) approach of identifying “abnormal” accruals contains substantial uncertainty and is less direct than the accrual quality measure.2 Dechow and Dichev (2002) suggest a method of distinguishing informative accruals from noninformative ones. They argue that when managers use discretionary accruals opportunistically, the current period accruals are less likely to be realized as future cash flows. In other words, the accrual quality measure, estimated as the association between current accruals and realized cash flows in the current as well as succeeding and previous years, deteriorates if the accruals are driven by opportunism, but not when they are motivated by the need to convey private information. Furthermore, the accrual quality measure is not subject to the criticism regarding the separation of discretionary and nondiscretionary accruals. On the basis of these considerations, we proxy audit quality by accrual quality. We measure accrual quality using the modification of the Dechow and Dichev 2002 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contemporary Accounting Research Wiley

The Differential Effects of Auditors' Nonaudit and Audit Fees on Accrual Quality *

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References (32)

Publisher
Wiley
Copyright
2007 Canadian Academic Accounting Association
ISSN
0823-9150
eISSN
1911-3846
DOI
10.1506/ARJ4-20P3-201K-3752
Publisher site
See Article on Publisher Site

Abstract

Contemporary Accounting Research Vol. 24 No. 2 (Summer 2007) pp. 595–629 © CAAA Contemporary Accounting Research separated out from total accruals (see, for example, Guay, Kothari, and Watts 1996; Bernard and Skinner 1996). Francis, LaFond, Olsson, and Schipper (2005) also argue1 that the modified Jones (Dechow, Sloan, and Sweeney 1995) approach of identifying “abnormal” accruals contains substantial uncertainty and is less direct than the accrual quality measure.2 Dechow and Dichev (2002) suggest a method of distinguishing informative accruals from noninformative ones. They argue that when managers use discretionary accruals opportunistically, the current period accruals are less likely to be realized as future cash flows. In other words, the accrual quality measure, estimated as the association between current accruals and realized cash flows in the current as well as succeeding and previous years, deteriorates if the accruals are driven by opportunism, but not when they are motivated by the need to convey private information. Furthermore, the accrual quality measure is not subject to the criticism regarding the separation of discretionary and nondiscretionary accruals. On the basis of these considerations, we proxy audit quality by accrual quality. We measure accrual quality using the modification of the Dechow and Dichev 2002

Journal

Contemporary Accounting ResearchWiley

Published: Jun 1, 2007

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