Author(s): Younghyo Song, Soo Yeon Park
This study investigates the effect of book-tax accruals, which affect both taxable income and reported earnings, on audit fees. Firms adjust the level of their book-tax accruals with high conformity to tax law and book-only accruals with low conformity for their tax and reporting strategy, and such adjustment decreases the informativeness of earnings. Based on that logic, we conjecture that auditors spend more time and increase their audit fees for auditing book-tax accruals with low earnings quality, considered as audit risks. The empirical analysis results show that there is a positive relation between the level of book-tax accruals and audit fees, indicating auditors incorporate the impact of book-tax accruals in audit fee decisions.