The Relationship between Audit Fee Discount and Audit Error and Earnings Quality in Times of Recession

Abstract

Objective: Earnings quality represents a very important aspect of accounting profits, because low-quality profits may increase capital costs, reduce investor confidence by making the wrong decisions, mislead creditors, and inappropriate allocation of resources to unrealistic return schemes. In the meantime, the role of the independent auditor in unbiased assessing the quality of the financial statements and reassuring investors about the validity of the financial statements prepared by management is significant. But the quality of audit services provided by auditors is heterogeneous and affected by factors such as audit fee discount. The purpose of this study is to test the relationship between audit fee discount and audit errors and earnings quality, especially in times of economic recession. Methods: In this regard, a sample of 135 companies listed in the Tehran Stock Exchange from 2011 to 2017 was selected and the hypotheses were tested by using regression models. Results: The results show that the audit fee discount has a positive relationship with audit type II error. However, there is no significant relationship between audit fee discount and audit type I error. Also, the recession does not affect the relationship between audit fee discounts and audit errors. Also, the audit fee discount reduces the quality of earnings and the economic recession exacerbates the negative relationship between audit fee discount and earnings quality. Conclusion: Deductions from auditors reduce their effort and increase audit error. Also, the quality of profit is lower in companies that pay less, and this relationship is exacerbated in times of recession.

Keywords

• audit fee discount
• audit error
• earnings quality
• recession