R&D capitalization and audit fees: Evidence from China

Jia Chi Cheng, Chia Chi Lu, Nan Ting Kuo

Research output: Contribution to journalArticlepeer-review

14 Scopus citations

Abstract

Our study investigates the association between capitalized R&D costs and audit fees and whether this association reflects the effect of earnings management. By exploring Chinese listed firms, we find that capitalized R&D costs are positively associated with audit fees, where such positive association holds for both the discretionary and nondiscretionary portions of capitalized R&D costs. Moreover, the positive association between the discretionary portion of capitalized R&D costs and audit fees is more pronounced for firms with stronger incentives to manipulate earnings. Overall, our findings imply that firms’ reporting incentives affect how auditors react to clients’ accounting choices. This in turn suggests that auditors believe some firms capitalize R&D to manipulate earnings, and the resulting earnings-management concerns lead them to charge higher fees.

Original languageEnglish
Pages (from-to)39-48
Number of pages10
JournalAdvances in Accounting
Volume35
DOIs
StatePublished - 1 Dec 2016

Keywords

  • Audit fees
  • Capitalized development costs
  • Earnings Management
  • Regulation of Stock Markets

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