Fee endogeneity, discretionary accruals and managerial incentives

Abstract

Our study examines linkages between discretionary accruals, management ownership and remuneration and non-audit service (NAS) fees. All findings for our study are based on an extensive analysis of 351 Singapore publicly listed firms for the 2001 fiscal year period. Inferential statistics results using OLS and 2SLS reveals three key findings. First, there is a negative association between discretionary accruals and NAS fees. Second, managerial ownership positively affects the negative association between discretionary accruals and NAS fees. Third, this positive affect is weaker amongst firms with high accounting-based management remuneration. Our study also documents that when using single-equation estimates audit committee effectiveness is found to have a significant positive (negative) influence on audit coverage (purchase NAS fees). After controlling for fee endogeneity, however, the evidence shows that audit committee effectiveness is not associated with purchase of either audit or NAS fees. Findings from single-equation models of audit and NAS fees confirm prior research showing a knowledge spillover effect. Consistent with emerging literature, however, we show that when using simultaneous-equations the association between audit and NASs fees suffers from simultaneous-equation bias. Thus, consistent with Whisenant et al., (2003) we conclude there is no knowledge spillover between the two fees. Another key feature of this paper is we expand the very limited literature investigating linkages between audit committee effectiveness and the two fees. We document a failure to control for the feedback relationship between the two fee types is likely to produce spurious findings and inferences.