RELATIONSHIP BETWEEN AUDITORS' FEES AND EARNINGS MANAGEMENT

This study investigates the relationship between audit fees and earnings management in the Brazilian market. In response to the research question, we used a sample of 300 firms listed on the BM&FBovespa for which it was possible to identify the amount paid to the auditors, using data gathered from the Economatica® database and the website of the Brazilian Securities Commission (Comissão Brasileira de Valores Mobiliários [CVM]). We analyzed the regressions with the aim of supporting or refuting the hypothesis that audit firms that charge less for their service tend to be more relaxed regarding earnings management by their client companies. The results support this hypothesis. The main contribution of this study is the possibility of stating that more aggressive earnings management occurs predominantly among firms that pay less than expected for audit services. This study evidences the perception of risk by audit firms and how this is reflected in the audit fees charged.

KEYWORDS:
Auditors; audit fees; audit quality; audit services; earnings management

Variables	Data Source
AFEE Natural log from audit fees	CVM
BIG4 Equals 1 if a firm is audited by Deloitte & Touche, Ernst & Young, KPMG, P&W	CVM
LTA Natural log of total assets at end of fiscal year	Economática
MTB Market-to-book index defined as market value of stocks divided by book value of equity	Economática
LEV Total Asset less equity divided by total asset	Economática
ROA Net profit divided by total assets	Economática
ARINV Receivables and Inventories divided by total assets.	Economática
TENURE Time of using the same Auditor firm in years	CVM
SEGMENT Number of segments in the business	CVM
LAGE Natural log of the age of the enterprise.	CVM
FULL_IFRS Equals 0 for 2009, 1 any other year after	Economática
CORPGOV Equals 1 if the enterprise is listed in the special corporate governance segment, and 0 otherwise.	CVM

Variable	Data base
TA Total Accrual, computed as Earnings before extraordinary items less cash flow from operations scaled by total assets	Economática
ΔSALES Variation on sales between last year and current year, scaled by total assets;	Economática
ΔAR Variation in accounts recievable between last year e curent year, scaled by total assets;	Economática
NCA Non current assets from current year scaled by total assets from previous year;	Economática
ROA_(it-1) Return on assets computed as earnings before extraordinary items divided for total assets.	Economática

Variables	Data Source
DAC Discretionary accrual computed using model (2); where 1 indicates income increasing earnings manage	Error from Model 2
NABAFEE Equal 1 if abnormal audit fees (err from model 1) is negative and zero otherwise;	Error from Model 1
NONAUDIT FEES Equal 1 if there is nonaudit fees paid to auditor and zero otherwise.	CVM
BIG4 Equal 1 if a firm is audited by Deloitte & Touche, Ernst & Young, KPMG, Pricewater	CVM
LMV Natural log of market value of stock at end of fiscal year.	Economatica
LOSS Equal 1 if a firm reported loss in the current year, and 0 otherwise.	Econonatica
CFO Cash flow from Operations scaled by total assets;	Economática
OPCYCLE Natural log of operational cycle days	Economática
VOLCFO Standard deviation of cash flow form operations from year t-4 to year t;	Economática
VOLSALE Standard deviation of sales scales by assets from year t-4 to year t;	CVM

Variables	Mean	Median	S.D.	25%	75%
AFEE	2.6489	2.6117	0.6038	2.2765	2.9731
BIG4	0.8251	1.0000	0.3800	1.0000	1.0000
LTA	3.4658	3.4658	0.7781	2.9337	3.9891
MTB	1.2558	1.4507	24.6138	0.8241	2.5352
LEV	0.6083	0.5846	0.3394	0.4465	0.7302
ROA	0.0402	0.0346	0.1330	0.0076	0.0727
ARINV	0.3776	0.2879	0.3639	0.1279	0.5057
TENURE	2.8866	2.0000	2.4982	1.0000	4.0000
SEGMENT	2.6285	1.0000	3.4761	1.0000	2.7500
LAGE	35.8129	36.0000	115.6347	13.0000	43.0000

Variables	Average	Median	S.D.	25%	75%
DAC	0.1497	0.0000	0.3569	0.0000	0.0000
NABAFEE	0.4591	0.0000	0.4986	0.0000	1.0000
NONAUDIT_FEES	0.3642	0.0000	0.4814	0.0000	1.0000
BIG4	0.8251	1.0000	0.3800	1.0000	1.0000
LMV	0.7831	0.8811	0.7247	0.5483	1.1515
LOSS	0.3367	0.0000	0.4728	0.0000	1.0000
CFO	0.0555	0.0550	0.1489	0.0027	0.1060
OPCYCLE	2.0890	2.0876	0.4243	1.8708	2.3010
VOLCFO	0.0499	0.0286	0.1298	0.0158	0.0507
VOLSALE	0.0455	0.0216	0.1109	0.0096	0.0475

	Section A Model 1		Section B Model 3
Dependent Variable	(1ª) \|AFEE\|	(2ª) \|AFEE\|	(1ª) \|DAC\|	(2ª) \|DAC\|
NABAFEE			1.0688 (3.37^* Note: *, , , significant at 1%, 5%, and 10% )*	1.0833 (3.34^* Note: *, , , significant at 1%, 5%, and 10% )*
NONAUDIT_FEES			0.4922 (1.49)	0.4088 (1.21)
BIG4	0.3073 (6.78^* Note: *, , , significant at 1%, 5%, and 10% )*	0.2957 (6.46^* Note: *, , , significant at 1%, 5%, and 10% )*	0.4225 (0.78)	0.6332 (1.12)
LTA	0.4701 (21.69^* Note: *, , , significant at 1%, 5%, and 10% )*	0.4713 (21.55^* Note: *, , , significant at 1%, 5%, and 10% )*
LMV			0.3421 (1.46)	0.3858 (1.57^* Note: *, , *, significant at 1%, 5%, and 10% )
MTB	0.0003 (0.37)	0.0002 (0.19)	0.0904 (2.62^* Note: *, , , significant at 1%, 5%, and 10% )*	0.1019 (3.07^* Note: *, , , significant at 1%, 5%, and 10% )*
LEV	0.0476 (1.04)	0.0232 (0.50)	-1.7043 (-1.92^ Note: , , , significant at 1%, 5%, and 10% )	-1.8641 (-1.96^ Note: , , , significant at 1%, 5%, and 10% )
LOSS			-1.8054 (-3.83^* Note: *, , , significant at 1%, 5%, and 10% )*	-1.7503 (-3.57^* Note: *, , , significant at 1%, 5%, and 10% )*
CFO			-29.3556 (-9.52^* Note: *, , , significant at 1%, 5%, and 10% )*	-29.477 (-8.78^* Note: *, , , significant at 1%, 5%, and 10% )*
OPCYCLE			-0.4615 (-1.20)	-0.3937 (-0.88)
VOLCFO			-0.9962 (-0.43)	-1.5256 (-0.63)
VOLSALE			4.7221 (2.07^ Note: , , , significant at 1%, 5%, and 10% )	6.5548 (2.33^* Note: , , , significant at 1%, 5%, and 10% )
ROA	0.0460 (0.44)	0.0379 (0.36)
ARINV	0.0706 (1.81^ Note: , , , significant at 1%, 5%, and 10% )	0.0912 (1.97^ Note: , , , significant at 1%, 5%, and 10% )
TENURE	0.0125 (1.82^ Note: , , , significant at 1%, 5%, and 10% )	0.0141 (2.04^ Note: , , , significant at 1%, 5%, and 10% )
SEGMENT	0.0082 (1.97^ Note: , , , significant at 1%, 5%, and 10% )	0.0067 (1.59^* Note: *, , , significant at 1%, 5%, and 10% )*
CHANGE_AUD	-0.0740 (-2.11^* Note: *, , , significant at 1%, 5%, and 10% )*	-0.0720 (-2.05^ Note: , , , significant at 1%, 5%, and 10% )
LAGE	-0.0015 (-1.87^ Note: , , , significant at 1%, 5%, and 10% )	-0.0017 (-1.98^ Note: , , , significant at 1%, 5%, and 10% )
CORPGOV	0.0797 (2.44^* Note: *, , , significant at 1%, 5%, and 10% )*	0.0848 (2.57^* Note: *, , , significant at 1%, 5%, and 10% )*	0.1654 (0.41)	0.0252 (0.06)
FULL_IFRS	-0.0536 (-1.61^* Note: *, , *, significant at 1%, 5%, and 10% )	-0.0589 (-1.76^* Note: *, , *, significant at 1%, 5%, and 10% )	-0.3689 (-0.99)	-0.3121 (-0.82)
CHEMISTRY		0.1500 (2.25^* Note: *, , , significant at 1%, 5%, and 10% )*		-1.1686 (-0.91)
CONSTRUCTION		-0.0034 (-0.41)		-0.0232 (-0.30)
FOOD_AND_DRINK		0.0226 (1.47)		-0.0047 (-0.03)
TEXTILE		-0.0081 (-0.82^ Note: , , , significant at 1%, 5%, and 10% )		-0.1927 (-1.4873)
TRADE		0.0232 (1.96^ Note: , , , significant at 1%, 5%, and 10% )		-0.1712 (-1.08)
TRANSPORTATION_AND_SERVI		0.0240 (1.16)		0.0279 (0.11)
VEHICLES_AND_PARTS		0.0240 (1.16)		0.0279 (0.11)
CONSTANT	0.7736 (8.75^ Note: , , , significant at 1%, 5%, and 10% )*	0.7682 (8.59^ Note: , , , significant at 1%, 5%, and 10% )*	07574> (-0.71)	-0.9195 (-0.79)
R²	0.5402	0.5487	0.4569	0.4664
Total panel> (Unbalanced) observations	837	837	727	727

Fundação Getulio Vargas, Escola de Administração de Empresas de S.Paulo Av 9 de Julho, 2029, 01313-902 S. Paulo - SP Brasil, Tel.: (55 11) 3799-7999, Fax: (55 11) 3799-7871 - São Paulo - SP - Brazil
E-mail: rae@fgv.br

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[TFN1] Note: This exhibit presents the definition of the variables and the source of the data for Model 1 – Determinants of Auditor Compensation.