8. Conclusion
During the recent Global Financial Crisis, auditors were under pressure from clients and audit committees to cut audit fees during the crisis. Since audit fees proxy for audit effort, regulators were concerned that lower audit fees during the crisis could result in lower audit effort, and more importantly, impaired audit quality. Did financial reporting quality and audit quality suffer as a result of the widespread and significant fee cuts? We conduct a comprehensive analysis of multiple attributes of client firms' earnings quality and audit quality. Collectively, our findings indicate that there is no significant difference in earnings quality between client firms that received a fee cut during the crisis and those that did not or those that received a fee cut prior to the crisis. Further, our results do not indicate that firms receiving a cut in audit fees during the crisis are less likely to receive a going concern opinion than firms in the control group. We also find that in general, the likelihood of a financial restatement is not significantly different between firms that received a fee cut during the crisis and the control firms.
One possible explanation for our results is that auditors responded to the increased risks arising from the crisis in several ways: issued technical guidance to staff, provided additional training, developed new audit tools, required additional audit procedures, and increased supervision of engagement personnel (PCAOB, 2010). Our findings are also consistent with findings in Krishnan and Zhang (Krishnan & Zhang, 2013), who examine the relation between audit fee cuts and the financial reporting quality of banks and conclude that Big 4 auditors constrained earnings management via loan loss provisions in banks that received cuts in audit fees.
