Fair Value and Abnormal Audit Fees

Abstract

Our study compares the financial reporting quality between a principles-based (i.e., fair value) and a rules-based (i.e., historical cost) accounting system. We explore a non-market based proxy of financial reporting quality: abnormal or unexplained audit fees. Utilizing a sample of European Union firms, we find that firms using a fair value accounting system have a lower level of abnormal audit fees. This result provides preliminary evidence that a fair value accounting system provides higher financial reporting quality.